Group sales fell -11.5% on a constant currency (cc) basis, impacted by healthcare destocking partly offset by a small gain in the industrial segment. Group EBIT was largely unchanged as the adverse inventory impact annualises, falling -0.1%.
Whilst destocking has masked actual underlying demand, prices continue to fall for single use products. This comes at a time where many high-priced legacy PPE contracts are beginning to roll off. Healthcare operators continue to be under financial pressure and are likely to remain highly sensitive to cost pressures.
Healthcare saw some organic growth from surgical, however a significant decline in exam and single revenue use was driven by destocking and price reductions. Life sciences also was affected by temporary distributor destocking, particularly in EMEA and APAC, indicating some potential loss of share.
The main green shoot was a 6.4% growth in industrial sales, driven by continued momentum in mechanical with growth in all regions, and chemical returned to growth following a period of decline from the pandemic peak. EBIT was significantly impacted by higher plant costs and continued competition in the disposable protective clothing segment, although was partly offset by some price implementation. Competitors such as DuPont have been dropping prices in some sub segments, indicating continued competitive pressures.
Investment View
The company continues to face increased competition, eroding its pricing premium and competitive advantage, and will need to continue to spend on innovation to recapture market share from other low-cost mass producers across Asia. This will put continued downward pressure on margins, impacting the earnings recovery.
We downgrade our rating from Hold to Sell given the continued cycling of pandemic sales, and a longer destocking process as customers assess over bought inventory levels. We are not confident that margins can recover in the short-term, although note FX swings and raw material volatility will impact the result. The bottom end of the FY23 guidance of 110-120cps is in line with pre Covid FY19 eps. At 15x PER, and an FY24 EPS likely to be in the same range as FY22, we struggle to see how ANN can outperform over the next 12 months.
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. Manufacturing oversights could result in delayed production or injury to staff impacting reputation.
Recommendation
We have downgraded our recommendation to Sell.
Figure 1: Actual results impacted by Russia exit and unfavourable FX, driven by lower healthcare segment demand
Figure 2: PER in line with 5-year average, although likely earnings downgrades to come
