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TRADING UPDATE

Need To Know

• Expects FY23 underlying EPS in the middle of its previous guidance range (US110-120cps), in line with consensus at US114cps
• Heavy FY24 downgrade(~17% at the midpoint), expecting adjusted EPS in the range of US92-112cps vs consensus at US123cps
• ANN noted continued destocking, although expect volumes to recover in 2H24. We reiterate our Sell rating.

Investment Implications

ANN provided a trading update ahead of its FY23 results, where it expects underlying EPS in the midpoint of its previous guidance of US110-120cps, in line with consensus at US114cps.

Industrial sales of $750m saw organic growth in the 2H in both mechanical and chemical as well as overall margin improvement versus 1H. Healthcare sales of ~$900m were down ~25% on FY22 with the effects of destocking of accumulated inventory continuing. Exam and Single Use saw encouraging volume improvement vs 1H, however the Surgical and Life Sciences businesses the impact was more pronounced, obscuring more favourable underlying end user demand.

FY24 conditions in Industrial are anticipated to improve, but will be influenced by broader macroeconomic developments. Healthcare volumes are expected to improve however offset by price reductions taken in FY23. Destocking is still expected into FY24, although orders are expected to improve 'towards the end of the fiscal year'.

In response to the headwinds, ANN is accelerating its productivity investment program, including a decision to temporarily slow the production of finished goods to normalise inventory holdings, improving cashflow in FY24 but lowering EBIT due to reduced manufacturing overhead absorption. ANN will also reduce employee count in order to provide a partial offset, whilst investing in improving longer term productivity through automation. Cash costs are expected to be $40-50m, however expected to deliver annualised pre-tax cost savings of $45m by FY26.

The digitisation strategy building on recent investments in modernising its IT systems are expected to incur costs of $30-$35m, with the majority in FY25 and FY26.

FY24 guidance is for adjusted EPS to be in the range of US92-112c, a -17% downgrade at the midpoint to FY24 consensus of $1.23. This is before the investment program costs, with statutory EPS expected to be between US57-77c. 

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 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 downgrade to FY24 numbers confirms our suspicions that the business and industry continues to struggle, and we don't anticipate ANN's share price to outperform anytime soon.