We are raising our fair value estimate for narrow moat Ansell to AUD 25 per share from AUD 22.50, following the better-than-expected sale price achieved for its sexual wellness business, which includes all of Ansell’s condom, lubricant, and devices business, as well as the manufacturing sites, but excludes the joint venture in India, JK Ansell, and a minor contributor to the divisional earnings. Our other operating assumptions remain unchanged. At current levels, we regard the stock as fairly valued.

The all-cash transaction is due to complete over the next four months and represents an EBITDA multiple of about 14 based on fiscal 2016 financials for the divested assets on an aftertax basis. This was above our expectations for the potential deal when flagged back in August 2016 at about USD 280 million, based on an EBIT multiple of 9 and a fiscal 2016 EBIT of USD 31 million. Nonetheless, we remain positive on the move to exit the category which is Ansell’s smallest by revenue despite the strong growth reported in fiscal 2016, given the direction of the company’s new product development efforts and increasing focus on B2B business segments, where it has a market-leading position. Ansell’s balance sheet remains solid with net debt/EBITDA of about 1.44 times at the interim and well below stated target maximum of 2 times.

Analyst: Chris Kallos, CFA

This insight is part of Smartkarma. For more follow this link.