Groundhog day

FY23 RESULTS

Need To Know

• Results pre-announced in late July, presentation largely focusing on strategic initiatives. Up to $50m buyback announced for FY24.
• FY23 EPS of 117.5cps, right in the middle of guidance. FY24 outlook unchanged (adjusted EPS 92c-112c)
• The ouloook for ANN remains challenged with destocking set to continue through FY24 before normalising in FY25

Investment Implications

The FY23 results were pre-announced in late July, with no real new surprises in the official accounts, making us live through the downgrade day again. The update largely focused on new strategic initiatives, and the announcement of a buyback "up to $50m." The final dividend was also a bit weaker than expected at US26cps, with the market expecting US27cps, and at the lowest end of its 40-50% target payout ratio. The outlook for ANN continues to remain challenged by destocking, with normalisation not set to occur until FY25.

ANN is looking towards its growth strategy, including expansion through emerging markets and continued product innovation to offset destocking effects and external headwinds. It has recently completed an overhaul of its Enterprise Resource Planning (ERP) system to assist with supply chain management, however large digital transformations often take far longer than anticipated and come with teething issues, and we don't expect any immediate results. 

Result Overview

Healthcare was the main segment impacted, as total sales declined 24.0% to $904.2m with Exam and Single Use sales down 29.2%, and Life Sciences down 25.5%. Surgical sales held up better, falling just 1.8%yoy, with strong growth in APAC, including over 20% in India. EBIT fell 24.8% to $113.4m, impacted by FX and the exit of Russian operations. 

Industrials fared better through the year, with sales falling just 1.5% to $750.9m and EBIT falling 2.9% to $103.9m. On an organic, constant currency basis and excluding the impact of Russia exit, Sales were up 4.3% and EBIT was up 10.1%. Mechanical sales were up 5.1% with growth experienced across all regions, and up double digit in emerging markets. Chemical sales were up 2.4%, largely led by pricing increases. 

Falling input material costs were offset by rising conversion costs, particularly with higher employee costs in Malaysia and Thailand and higher energy costs, although this began to moderate in 2H. Whilst some input costs continue to fall as supply chains normalise, we expect labour pressures to remain, and recent oil price activity indicates energy expenses are likely to remain higher. Capex spend was flat on FY22 at $67.2m, with $18m spent on a greenfield site in India for surgical production. FY24 capex is expected to be between $60-80m.

The balance sheet remains in a strong position, with net debt increasing slightly to 1.2x EBITDA from 0.9x. There is significant headroom for investments, M&A and capital management iniatives (including the announced buyback).

Investment Implications

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 retain our Sell rating 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 soft FY24 outlook and significant required spending in its strategic initiatives confirm our suspicions that the business and industry continues to struggle, and we don't anticipate ANN's share price to outperform anytime soon, and after the recent earnings downgrade, the PER looks elevated.

Figure 1: The recent downgrade to forward earnings has seen the PER spike higher