Needs a hand

1H23 RESULT

Need To Know

• Downgrading FY23 EPS guidance by ~8.0% at the midpoint from US$1.15-$1.35 to $1.10-$1.20
• Acquired remaining 50% shareholding in Careplus for ~US$9m using cash (first 50% also ~US$9m)
• US 20.1cps dividend at 40% payout ratio, on-market buyback to continue in 2H

ANN announced a downgrade to its guidance, reflecting weaker demand conditions in the healthcare segment than previously expected. Destocking trends broadened beyond medical to include industrial exam and single use products. ANN declared an interim dividend of US 20.1cps and a continuation of its buyback program. 

Result miss. Revenue of US$835m was 6% below consensus, driven by healthcare sales falling 21.9% on an organic constant currency-basis. Strong performance in surgical was more than offset by planned price reductions in exam and single use and weaker conditions including customer destocking affected demand for life sciences products.

EBIT was 0.1% lower on an organic constant currency-basis and declined 17.6% on a reported basis due to the exit from Russia (US$5.7m impact) in FY22 and unfavourable FX changes (US$13.8m impact), despite an estimated US$11-15m hedging benefit over FY23.

Industrial segment only positive. Organic constant currency growth was 6.4% with strong performances in North America and emerging markets. Mechanical sales grew in all regions and Chemical returned to growth after a period impacted by declining pandemic demand for disposable protective clothing.

Acquisition. In May 2020, ANN purchased a 50% holding in Careplus to access additional surgical glove capacity to meet high market demand. ANN has now purchased the remaining 50% stake, noting that it is Careplus’ main customer. It is expected to be EPS neutral in FY23 and to close in March 2023. 

Downgrade. At the midpoint, the new EPS guidance for FY23 is ~8% lower. Further, in FY24, ANN expect its book tax rate to increase from 20.5%-21.5% to 22.5%-24.5% on higher tax rates in Sri Lanka. 

Investment View

ANN is clearly continuing to cycle its pandemic related sales, with customers having over-ordered on a supply constrained market. The destocking is moderating at a slower rate than ANN expected, with a significant reduction in hospital purchase orders. As the supply continues to recover from additional capacity in China, ANN’s pricing premium will continue to come under pressure in the hospital segment. 

Our Hold recommendation is currently under review. 

Figure 1: Actual results impacted by Russia exit and unfavourable FX, driven by lower healthcare segment demand