One stock we had to get our hands on

One stock we had to get our hands on

During reporting season, we were quick to build a new position in a company after seeing a much stronger result than we had forecast in our research. A large cash holding allows Montgomery Investment Management to be nimble when opportunities present themselves.

So, the new addition to the Montgomery Private Fund and The Montgomery Fund is Ansell (ASX: ANN).

Ansell is a global manufacturer of protection solutions, primarily specialising in 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 meaningful benefits that have now accumulated to be the largest player in the market.

Ansell’s largest acquisition was BarrierSafe International in 2014, 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 along the supply chain. Furthermore, BarrierSafe’s sales have been isolated to the United States’ market, which means that meaningful revenue synergies can be provided through Ansell’s global sales force.

We are particularly attracted by Ansell’s focus on its core products, which comprise around 50 per cent of sales. By rationalising non-core products, the company can better leverage its manufacturing facilities and the sales force can deliver a stronger brand to the end user. But it’s not just acquisitive growth that is driving the company’s improved performance. Organic growth is returning after new product development initiatives from prior years begin to present themselves in the market.

We expect Ansell will achieve meaningful margin expansion in the coming years. This will primarily be driven by operational efficiencies, as the company continues to invest around $60-$70 million each year to reduce working capital with lean manufacturing initiatives and technological innovation. Margins should also be favourably impacted by the falling oil price.

When the company announced their financial results in the first-half of 2015, Management commented that cash flows have been stronger than expected. This positions the company well for further deals, however Management has noted that they are not dependent on acquisitions in order to grow.

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. While Ansell is not an exception to this dynamic, we feel it has provided a sufficient margin of safety to take a meaningful position in both the Montgomery Private Fund and The Montgomery Fund.

Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.