Ansell’s horrible first half result was in line with the downgrade announced on 31 January. A late move to slash costs saved the result from total disaster as operating conditions deteriorated significantly.
The January earnings confession was delivered by a staunch management determined to blame an import ban on a key supplier and a temporary COVID impact. A more contrite management outlaid its interim result with a concession that it has little ability to predict the market direction. Acknowledging that exam glove prices are heading back to pre-COVID levels is closer to reality than the previous guidance of 20% higher.
ANN has responded to the change with some aggressive SG&A cost cuts, and this has provided some breathing space. But we are yet to see complete acceptance of the new operating reality to which the company must adjust.
Industry capacity has effectively doubled in the 3 years to CY22 presenting a major risk to pricing, product segmentation and return on investment across the industry. History tells us that the industry could be in for a long and painful restructure.
When we see ANN reinvesting its adequate balance sheet to adapt to this new environment, it should be a positive signal to the market.
The risk is that savage SG&A cuts could do irreparable damage in the meantime.
ANN’s guidance for FY22 EPS was lowered to 125-145cps from 175-195cps at the January downgrade.
Healthcare segment sales increased 15% but EBIT crumpled 41% as prices collapsed. Exam and Single Use gloves grew 18%. EBIT margin dropped a massive 858bp to 10.1%.
Extreme moves in raw material costs provided a big headwind in 1H22 and has crept into 2H22 due to the 3-month manufacturing cycle. Cotton and synthetic fibres have also seen extreme price movements with global market dislocation after Chinese export bans. Latex prices have also risen after a brief reprieve earlier in the half.
Investment view
ANN is staring at the abyss of plunging global glove prices as industry capacity gets way out of hand. Shaking the cost tree can only mitigate the situation so far, so ANN needs to participate in an industry-wide restructure before fortunes can be saved. This is plainly easier said than done, so management confidence in its guidance is understandably low.
Risks to investment view
Global glove industry over-capacity could take longer to restructure, prolonging a recovery in ANN earnings.
Recommendation
We have retained our Sell recommendation.
