Morgan Stanley believes that foreign exchange headwinds for Ansell will be offset by raw material and transformation programme tailwinds.
The firm reports earnings next Tuesday and is targeting a return to its 3 per cent to 5 per cent organic growth range.
Morgan Stanley is forecasting Ansell to hit the bottom of that organic growth range in financial year 2020.
It’s expecting a negative foreign exchange hit of $US13.9 million unhedged in 2020 but it is working on the assumption that around 50 per cent of this is hedged.
At the same time, the broker is estimating Ansell will get a raw material boost of around $US8 million in financial year 2020 compared to a year ago.
Morgan Stanley is also expecting Ansell to utilise its “substantially improved” balance sheet headroom either through capital management or M&A.
The firm trades at a 32 per cent discount to the one-year forward PE of the ASX industrials ex-financials index. the broker said, compared to a five-year average discount of 20 per cent.
“Given ongoing improvement with respect to visibility of foreign exchange, input costs,and organic growth, we think Ansell does not deserve this current discount and see the long-term average as more appropriate.” it said.
“We expect the stock to outperform, given its defensive characteristics, low exposure to an Australian credit/consumer crunch and leverage to a falling Australian dollar.”
Morgan Stanley is overweight on Ansell and lifted its price target to $35.30 from $31.60.