Commodity prices have increased substantially, triggered by recent global events forcing key input prices up for Ansell. At the same time, overcapacity in the industry is causing glove prices to keep falling. Commodity prices are heading higher for most of ANN’s key inputs.
Cotton represents 21% of COGS (cost of goods sold) and has remained near record levels, wet latex (5% of COGS) has spiked about 25% alongside other soft commodities and oil’s 60% rise is pushing petrochemical prices higher.
Butadiene (15% of COGS) spot pricing is unreliable, but we understand that the long-established link between oil and synthetic rubber is intact and will push prices higher.
The production cycle is approximately 3 months, so these latest price hikes are likely to bite into FY23f earnings.
The unfortunate reality for ANN is that this has coincided with a massive increase in industry capacity of global glove manufacturing. By the end of CY22, capacity will have doubled within 3 years
presenting a major risk to finished product pricing.
ANN recently reported its 1H22 result which showed healthcare EBIT margin had collapsed by a huge 858bp to 10.1% as prices fell heavily. Earlier, on 31 January 2022, ANN had downgraded its FY22f EPS guidance by 27% at the mid-point from US185cps to US135cps. But conditions have since become materially worse.
ANN sells product in Russia and opened a manufacturing facility in 2021. We estimate that Russia contributes less than 2% of group sales. Products manufactured there are sold locally, and some product is imported within the medical sector so it is unclear if sanctions apply although the logistics and freight factors may be challenging.
Investment view
ANN’s revised FY22f guidance already looks to be in trouble. The combination of rising input costs and falling product prices is a simple equation for investors to absorb.
ANN did respond in 1H22 by reducing SG&A costs but we think this will not be sufficient to avoid a further downgrade to guidance. We think consensus forecast earnings are too high and are not reflecting the reality of the industry. Perhaps, like the company, there is hope that ANN’s premium products can mitigate the situation, but we do not concur with this thinking.
We placed a Sell recommendation on ANN on 20 September 2021 at $34.65 per share. We see no reason to change this view.
Risks to investment view
The sharp increase in commodity prices might be temporary and short term in nature if geopolitical tensions abate sooner. If the global glove manufacturing industry can enact a meaningful restructure of capacity and pricing, earnings might not be affected as much as predicted.
Recommendation
We have retained our Sell recommendation.
