Investment Thesis

• ANN is a reputable company with international production capability.
• The 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21.
• ANN’s share price trades at a >10% discount in comparison to DCF valuation
• FX translation should be positive for the Company. 
•  Raw material cost pressures can be shared with customers and suppliers.
• ANN has a healthy financial sheet, allowing it to repay cash to shareholders or borrow money to fund acquisitions.

Key Risk

• Recall of a product.
• Trade wars escalate, leading to higher tariffs.
• Increase in competitive pressures.
• Adverse movements in AUD/USD.
• The expansion of emerging and developed markets both disappoints.
• Any worse or better prices for raw materials.

Key highlights of FY21

•  Sales of $2,027m, up by 25.6% (+22.5% in CC) with Healthcare organic growth of 34.8% and Industrial organic growth of 7.1%. 
•  EBIT of $338m, up by 56.0% (+51.4% in CC) with margin improving 330bps to 16.7%, driven by higher production volumes, pricing/mix benefit and SG&A operating leverage, partly offset by elevated labour and freight costs combined with increase in inventory provision.
•  Profit Attributable to ANN shareholders of $246.7m, up by 57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up by 59.9% (+50.8% I CC). 
•  Operating Cash Flow of $49.2m (down by 74.3% over pcp) representing cash conversion of 60.9%, negatively impacted due to greater investment in working capital to support top line growth along with pricing impact as well as higher capex to increase capacity in a number of higher demanded products.
• ROCE saw significant improvement (up +590bps to 19.8% pre-tax and up +550bps to 16.8% post tax), predominantly due to strong EBIT growth.
• Final dividend of US43.6cps (up +54.3% over pcp), taking full year dividend to US76.8cps, up +53.6% over pcp and representing payout of 40%.
• Strong financial position with ample liquidity of $464m (cash and committed undrawn bank facilities), conservative gearing profile (net debt/EBITDA of 0.7x vs 0.6x in pcp), well managed debt profile with net debt position below target leverage and no significant upcoming maturities in the next 12-months and investment grade rating of Baa2 by Moody’s.

FY 22 Outlook

Assuming net interest expense in the range of $20-21m, effective tax rate in the range of 22-23% and increased software investments where a portion will now be expensed rather than capitalised and amortised pursuant to the new cloud computing accounting policy resulting in 5-6cps adverse EPS impact, management anticipates EPS to be in the range of 175-195cps. Management further noted on the analyst conference call, “we expect continued demand for Mechanical, Surgical, Life Sciences and internally manufactured Single Use gloves, however, lower demand is expected in areas which benefited most during the onset of COVID-19 .

Company Profile

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its  Sexual Wellness Global Business Unit group.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Investment Thesis

• Management believes it will be difficult to achieve a ROE target of 10% in FY21 due to factors affecting both the underlying ITR and cost to income targets, as well as the historically low interest rate environment, but it hopes to maintain an ordinary dividend payout ratio of 60-80 percent of cash earnings.
• SUN has a 2-year forward PE-multiple of 15.0x and a fully franked yield of 5.3 percent, which is excellent.
• A $250 million share repurchase programme should help the company’s stock price.
• SUN’s Bank has been granted advanced accreditation by APRA, resulting in capital relief.
•  Banking and general insurance margins outperformed expectations (GI).
•  The Royal Commission’s recommendations have resulted in positive changes in the sector.
•  Maintaining net interest margins while maintaining good credit quality in its Bank and Wealth sector.
•  Management has the ability to continuously maintain an underlying insurance trading ratio of 12 percent and a sustainable ROE of at least 10% in the future.

Key Risk

• Competition in insurance lines is greater than predicted, affecting pricing, unit growth, and risk management.
• Continuing high-intensity natural disasters, like the NSW bushfires, which will deplete reinsurance and have an impact on SUN’s profitability.
• Key milestones for FY21, such as the rollout of the Company’s technology and digital platforms, have not been met.
• Investment returns are lower than projected.
• Net interest margins are lower or provisions are larger than projected.
• An increase in the number of claims.

Key highlights of FY21

• SUN reported strong FY21 results reflecting cash earnings of $1,064m, up by 42.1% and Group NPAT, up by 13.1% to $1,033m.
• By segments: Relative to the pcp: (1) Insurance (Australia): PAT of $547m, was up by 42.4%.(2) Banking & Wealth: PAT of $419m was up +69% on net interest margins of 2.07%, up 13bps. (3)NZ: PAT of $200m declined by 18.4% driven lower by General Insurance PAT of NZ$177m, declining 19.2% (mainly due to higher natural hazard costs and lower investment income).
• SUN reported better top-line growth, with Gross Written Premium (GWP) growth of 5.5 percent in Australia and 9.2 percent in New Zealand, respectively (best insurance top-line performance in almost a decade).
• Suncorp Bank  home lending grew by 0.8 percent in the second half of 2021, and has grown home loans for six months in a row as of July 31, 2021.
• The Board declared a fully franked final ordinary dividend of 40cps which brings FY21 total fully franked ordinary dividends to 66cps (on a 79.3% payout ratio, and up from 36cps in FY20, on 60.7% payout ratio), a fully franked 8 cent special dividend, and an on-market share buyback of up to $250m (which should support its share price).

Guidance commentary: (1) FY23 Plan: “The plan intends to deliver a growing business with a sustainable return on equity above the cost of equity throughout the cycle.” The Group is investing in 12 major projects to achieve this, with the program’s advantages beginning to be realised in 2H22. (2) Natural hazard and reinsurance: SUN has increased its natural hazard allowance for FY22 to $980 million. (3) Releases of prior-year reserves: SUN continues to allow for prior-year reserve releases if inflation continues low, releases should be at least 1.5 percent of Group NEP. (4) Operating expenses: The Group’s operating expense base is estimated to be $2.8 billion, including project spending and restructuring charges in fiscal year 22. (6) Capital: SUN remains committed to a 60-80% dividend distribution ratio”.

Company Profile

Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Investment Thesis:

• Trading below analysts’ valuation 
• Fundamentals for the vehicle aftermarket continue to remain strong (with increase in second hand vehicle sales; travellers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilising their vehicles)
• Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth). 
• Strong earnings growth profile
• Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers
• Significant distribution network across Australia to leverage from
• Ongoing bolt on acquisitions and associated synergies
• Growing BAP’s own brand strategy, which should be positive for margins
• BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products
• Weak macro story of leveraged Australian consumer and lower growth environment persisting
• Thailand represents a meaningful opportunity 

Key Risks:

• Rising competitive pressures 
• Value destructive acquisition
• Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures)
• Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower
• Integration (and therefore synergies) of recent acquisitions underperform market expectations 
• Execution risk around Thailand

Key highlights:

• BAP delivered a record result with FY21 revenue up +20.4% over the pcp, driven by increased revenue and earnings across all business segments
• Pro forma EBITDA and NPAT, were up +28.8%, and +46.5% respectively, over the pcp.
• The revenue and EBITDA generated by segments are:

1. Trade: Delivered record revenue of $649m, up by 15.5% and EBITDA of $115m, which is up by 19%
2. New Zealand: Revenue of $170m, was up 8.8% and EBITDA of $33m, was up 21.2%
3. Specialist Wholesale (‘SWG’): Revenue of $660m, and EBITDA of $90m was up +26.8% and +42.2% respectively
4. Retail: Revenue of $369m increased +26.1% and EBITDA of $65m increased +20.1%
5. Asia: On BAP’s 25% investment in Tye Soon and Thailand, management highlighted revenue up by 26% and profit after tax of $2.2m

Company Description: 

Bapcor Ltd (BAP) is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.