Suffice to say, Ansell will be glad to see the back of FY22. The relatively good news is that things are looking less grim for FY23f, hence the company’s modestly cheerful EPS guidance has cajoled our recommendation up to a Hold.
Dealing firstly with the ugly stuff, FY22 group EBIT sank 33% to US$228.1 million on a statutory basis that included $17 million of business disruption and exit costs from Russia. That meant FY22 EPS of US123.8cps was in the middle of the previously lowered guidance range.
Healthcare (Single use and Medical) EBIT plunged 41.4% on a constant currency basis (CC) and margin bellyflopped 740bp to 12.7%. ANN said selling high cost inventory from outsourced Exam/SU suppliers at low margins was the key problem. COVID-related manufacturing disruptions and higher freight costs infected the wound.
Healthcare EBIT margins can get back to 14-15% with continued strong results from Surgical and Life Science products. The company expects Exam/SU prices to continue to decline but these remain above pre-COVID levels.
Industrial revenue was less horrible with sales down 3.6% and EBIT down 12% to US$107 million. EBIT margin was flat but on-going EBIT is expected to decline. Higher raw material and freight costs could not be offset by price increases. Manufacturing shutdowns and labour shortages caused by COVID-19 also hurt performance.
The company has decided to exit its Russian operations meaning about $9 million of EBIT will not be in FY23f numbers. In Sri Lanka, where ANN has two plants, political and economic upheaval has not yet affected operations, but the risk is high.
Investment view
ANN fought bravely in a terrible FY22 market. Strong cost control helped cauterise some of the damage with 2H22 SG&A costs down 18% and corporate costs nuked by 71%. This is a scorched earth approach to cost management and cannot be sustained, in our view. FY23f costs will lift towards FY21 levels as employee costs normalise. Higher raw materials, freight and salary costs will feature again in FY23f, as will foreign currency headwinds just as the COVID impacts begin to recede.
ANN is out of triage, but a period of rehabilitation awaits. Investors are encouraged to visit, but no flowers please.
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 lifted our recommendation to Hold.
