There are obvious locations for takeover activity in 2016: the media sector as media-ownership laws are reformed; transport and agriculture stocks as global firms target the Asia middle-class; and beaten-up resource stocks that are priced for Armageddon.
But the best takeover battles could come from unexpected paths: the left-field ideas that few predict and are based on company-specific ideas rather than themes. That was the case in 2015 with Japan Post’s takeover of Toll Holdings, and bids for Asciano and Broadspectrum.
Protective gloves firm Ansell rarely features on takeover targets lists. The maker of condoms and medical, industrial and household gloves does not have obvious takeover appeal or a high market profile. It operates in mostly commoditised markets that have lower barriers to entry, and faces sluggish organic growth in developed markets.
That’s hardly the stuff to get predators swooping. But the market is undervaluing Ansell’s dominant position in several key markets, at the current price, and factoring in too much bad news based on non-recurring problems around tax and foreign-exchange expenses.
The market could not get enough of Ansell last year. It soared 40% between January 2014 and April 2015, amid expectations of stronger earnings growth.
Then reality struck. Ansell’s 2014-15 profit result broadly met market expectations, but the strengthening US dollar and uncertainty in emerging markets led to a significant downgrade in earnings guidance. Its organic growth limped in at 0.6% in FY15.
A jittery market hammered Ansell. It slumped from a 52-week high of $30.40 in April to $18.48 in October, before edging up to $19.96. The heavy price falls wiped out almost two years of share-price gains, even though the main causes were related to currency and tax rather than ongoing operational issues.
Chart 1: Ansell (ANN)
Source: Yahoo
That’s the bad news. The good news is that Ansell is in value territory after heavy share-price falls. It meets the first criterion for the Switzer Super Report takeover target lists: an attractive investment at the current price with or without a takeover approach. It has good earnings consistency and defensive qualities – valuable attributes in an uncertain market.
At $19.96, Ansell trades on a forecast Price Earnings (PE) multiple of about 13 times FY16 earnings, according to consensus analyst estimates. On Macquarie Equities Research numbers, Ansell trades at a 16% discount to the ASX 300 index (based on a $20.84 share price).
Macquarie has an outperform recommendation and a $26 target price over 12 months. Morningstar has an accumulate recommendation and values Ansell shares at $25. Share-valuation tool Skaffold values Ansell at $24.38 in three years. These and other broking forecasts suggest the firm is among the more undervalued blue-chip industrial stocks.
So why is Ansell trading at a big discount to the rest of the market when it has leading global brands in its segments and strong, growing exposure to emerging markets that will have higher demand for protective gloves and condoms? My guess is that some large medical-supplies companies are asking the same question as Ansell’s share price falls.
Like other firms, Ansell is struggling with sluggish organic growth and having to find opportunistic, bolt-on acquisitions to boost sales. A multinational US consumer goods company, facing the same weakness in organic growth, could find Ansell a neat acquisition given its leading market position in industrial, single-use and medical gloves, and number-two position in branded condoms.
Ansell is arguably more innovative than the market appreciates. It has launched more than 100 new products and innovations over the past three years and achieved 35% new-product sales growth in FY15 – an excellent result. A solid balance sheet and economies of scale provide scope to innovate and achieve higher margins than competitors, without huge outlays in capital expenditure or research and development.
Although Ansell is suffering from its exposure to Brazil and Russia, its growing presence in emerging markets is a significant long-term strength. An expected boom in middle-class consumption in emerging markets over the next 15 years will surely drive stronger demand for protective gloves and clothing and sexual wellness products.
Yes, Ansell has plenty of immediate challenges. But the market appears to have over-reacted to the earnings guidance downgrade and become too short-sighted.
That has created an opportunity for a predator with a longer-term focus to bid for an Australian industrial business with a genuine offshore footprint, market-leading position in key segments, and valuable emerging-markets exposure. Such businesses are rare in Australia.
3P Learning has strategic appeal
I confess a great interest in online education. Few business models are more powerful than selling the same digital content over and over, in a global market, and benefiting from recurring income and high margins. It’s a beautiful business when it works.
I’ve followed online education provider 3P Learning since its float in July 2014 and recently wrote on it for the Switzer Super Report in an article on new-media stocks.
About 5.3 million children in more than 200 countries use 3P Learning products, the best known of which is Mathletics. It distributes Reading Eggs, another favourite online education tool among parents eager for their children to learn to read early.
However, 3P Learning has struggled to trade above its $2.50 issue price, despite exceeding its prospectus forecasts, making smart investments in US educational businesses that complement its product suite, and generally performing well.
At $2 a share, 3P Learning trades on a forecast PE multiple of about 18 times, based on a small consensus of broker forecasts. Deutsche Bank reportedly had a $2.90 share-price target for 3P Learning in September.
Most software companies expanding rapidly overseas and delivering 20 % annual revenue growth demand higher valuation multiples.
3P Learning’s relationship with 17,000 schools worldwide and growing US presence are significant assets that are hard to replicate. A bigger educational company could bolt-on 3P Learning’s products and distribution channel and harness its creativity and innovation to develop other products.
Like Ansell, 3P Learning is an interesting long-term investment at the current price, regardless of any takeover approach, for investors comfortable with small-cap stocks. If the market cannot see the value in a fast-growing global education company with 5.3 million users worldwide, a larger education-software company eventually will.
Chart 2: 3P Learning
Source: Yahoo
Takeover targets update
It was another busy month of the Switzer Super Report takeover targets list.
Online foreign-exchange provider OzForexGroup received a preliminary takeover approach from Western Union in November and granted it exclusive due-diligence rights later that month. OzForex’s share spiked by almost a third on the news.
Among other stocks, insurance and utilities products aggregator iSelect wisely ended discussion with suitor Providence Equity Partners. After a procession of CEOs, iSelect was in no shape to get the best shareholder outcome.
Finally, thanks to readers for their support of this column over the past 18 months. I wish you a safe and happy holiday period and look forward to resuming this column in 2016, in what should be a boom year for mergers and acquisitions.
Source: Morningstar for one-year total return (assumes dividend reinvestment). Standard & Poor’s for ASX 200 return. South 32 return calculated against its listing price.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
