Key points
- Having aggressively pursued acquisitive growth in the past three years, Ansell is now beginning to see the benefit.
- The shift towards lean manufacturing resulted in $10 million of annual savings in FY11, but $20 million in annual savings in FY14.
- Ansell’s share price and prospects offer a sufficient margin of safety to warrant a position.
The share market has rallied sharply since the start of the calendar year, driven by investors demanding higher income. During this time however, we have maintained relatively high weightings to cash in The Montgomery Fund and The Montgomery [Private] Fund. One advantage of a higher cash weighting is the ability it affords to be an opportunist.
During reporting season, for example, we were quick to build a new position – that is already profitable – in one company after seeing a much stronger result than we had previously forecast.
Ansell develops intellectual property
The new addition is Ansell (ASX: ANN). Ansell is a global manufacturer of protection solutions, primarily gloves for customers in the industrial, automotive and life sciences sectors. Having aggressively pursued acquisitive growth in the past three years, the company is beginning to see the benefits that sometimes accrue to the largest player in a market.
Ansell
[1]Source: Yahoo!7 Finance, 12 March 2015
Scale benefits are enormously important for manufacturers to remain competitive. With greater size comes greater bargaining power with suppliers, and higher volumes means greater economies of scale – leveraging a large fixed asset base.
Ansell is not a manufacturer of a generic commodity. While you may consider that one glove is like any other, Ansell has developed considerable intellectual property to set its products apart and that allows it to charge a premium. Gloves are not a material expense for most companies, yet hand injuries sustained by employees can be very costly. A few extra cents does not seem much to improve the safety of a company’s workforce.
We are particularly attracted by Ansell’s focus on its core brands. Companies are shifting away from niche applications, and are instead demanding products that are useful in any part of a plant. By rationalising non-core products, the company can better leverage its manufacturing facilities, while the sales force can deliver a stronger brand to the end user. Recall Henry Ford’s iconic offer that you could buy the T-model Ford in any colour as long as it was black.
Strong leadership
And it’s not just inorganic growth that is driving the company’s improved performance. Since assuming the position in 2010, the CEO has had a keen focus on operational efficiency and new product development. These initiatives have a long lead-time but are now bearing fruit. For example, the shift towards lean manufacturing resulted in $10 million of annual savings in FY11, but $20 million in annual savings in FY14, and this saving rate is expected to double again in the next three to four years. Sales of new products in the Industrial division have doubled in past 12 months.
We also expect Ansell will achieve margin expansion in coming years. This will primarily be driven by operational efficiencies and technological innovation, as the company continues reinvesting around $60-$70 million each year.
When Ansell announced the first-half 2015 results, management commented that cash flows have been stronger than expected. This is largely due to a smooth integration of Ansell’s largest acquisition, BarrierSafe Solutions, which sells the leading single-use glove in the United States.
Unlike Ansell, Barriersafe outsources manufacturing, which provides the company with new initiatives to optimise the supply chain. BarrierSafe’s sales have also been isolated to the United States market, which means that meaningful revenue synergies can be provided through Ansell’s global sales force.
While Ansell is well positioned and amply funded to pursue acquisitions, management has noted that they are not dependent on them to grow.
The outlook
As with any investment there are caveats. At the first half results briefing, the company maintained full-year 2015 guidance, but warned the world had become even more uncertain over the previous quarter. While we currently believe Ansell has sufficient global diversification to weather shocks in major economies, we are watching the 25% of Ansell’s sales that are denominated in euros.
With the market continuing to favour quality companies, it is rare to find investments that are trading at deep discounts to our estimates of intrinsic value. Ansell is not an exception to this dynamic, however it’s share price and prospects offer a sufficient margin of safety to warrant a position.
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