Should you buy shares in a PPE manufacturer during a pandemic?

Few businesses are more acutely aware of the impact of COVID-19 than Ansell (ASX:ANN). Ansell manufacture and distribute safety equipment such as gloves, body protection suits, and other personal protective equipment (PPE). They derive 55% of their revenue from health care sector, and 45% from industrial applications.

Most of us wouldn't have known what PPE was 18 months ago, but now we are all intimately aware of it, its importance, and the difficulties that arise when it is in short supply. This surge in demand has provided Ansell with challenges and opportunities.

The challenges have included keeping manufacturing facilities running at full capacity when they are located in the midst of COVID outbreaks, along with increased costs of raw materials and disruptions to global shipping. They also had a small number of incidents where governments seized shipments because they were desperate to supply their own people rather than see the precious PPE pass through to other places.

To capitalise on the opportunities they have been increasing their manufacturing capacity, adding additional manufacturing lines in Thailand and Malaysia.

But the concern for investors is will this investment continue to pay off in many years' time when the COVID crisis has passed. There are a number of factors that indicate Ansell is likely to continue experiencing strong demand for its healthcare products well into the future.

Firstly, despite the rollout of vaccines, the crisis itself is yet to start easing. Countries, where the rollout of vaccines is well advanced, are starting to reap the benefits, but many parts of the world are seeing record levels of infection and deaths. The last two weeks have averaged well over 800,000 new infections per day globally which is the highest level witnessed since the pandemic began.

There is also a very real threat that the virus will continue to mutate prolonging the battle to overcome it. Vaccines may not be as effective on the new variants. CEO of Ansell, Magnus Nicolin, has stated that he is preparing for the long haul and expects that we will still be dealing with some form of COVID at least until 2024.

Even if vaccines prove effective and the world starts to get back to something more normal in a year or two, there will remain a heightened sense of caution around hygiene practices which will lead to a permanent shift in the demand for PPE. Based on internal analysis of external data, Ansell forecast that the surge levels of demand for single-use PPE will ease off by 2023 but the average annual growth rate in the demand will have shifted from shift 4% pre-COVID, to 6% post COVID.

Of course, health care is only one side of Ansell's business. Other areas of the business that saw an easing of demand during the pandemic, such as automotive manufacturing and aerospace, will rebound as economic growth starts to gather pace. We are already seeing strong economic growth in key places like the US and China, as well as Australia as economies start to open up and the enormous amounts of economic stimulus start to kick in.

The panic that ensued around PPE during the early days of the COVID crisis is causing many customers and governments to look to have secure long-term agreements in place to ensure supply certainty. Emerging markets are also showing strong growth as they push their PPE usage per capita to similar levels to the US.

Such high levels of demand, which has only been constrained by the capacity of supply, has enabled Ansell to realise price increases, albeit within the bounds of what seems fair. Sales revenue is expected to grow by at least 26% this financial year with earnings per share growing in the order of 60%.

On the April 28, Ansell upgraded their earnings per share guidance by 20% from their previous forecast two months earlier. This was largely due to their success in managing manufacturing and supply, enabling them to continue to support the elevated levels of demand. This surge in sales and profits will most likely lead to a record year result by a considerable margin.

The balance sheet is very strong with only a small amount of debt, which means that the primary risk with an investment is the valuation considering the longer term outlook.

The forward PE ratio is about 16.5 which is fairly consistent with what it has averaged over the last five years. However, as has been argued above, the prospects are probably better now than what they have been during those preceding five years. The broader market is sceptical that the elevated levels of sales and profitability can be sustained, however there is a strong argument that the risk is to the upside. This safety-focused business may prove to be one of the safer investments during these uncertain times.

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