Ansell’s guidance, reaffirmed at the November 2021 annual meeting, has succumbed to the impact of COVID-19. But the company has pointed the finger at an import ban on a key supplier and suggested the COVID impact is non-recurring. We think this falls short of reality and we maintain our Sell recommendation.
ANN said its recovery from manufacturing shutdowns earlier in the financial year had been slower than expected due to lost labour availability and logistics disruption.
ANN said its 1H22 sales would be US$1,009 million, EBIT US$111 million and EPS US61cps.
ANN added that one of its factories in Malaysia had been shut for a week due to COVID-19 incidences. More importantly, the US Customs and Border Protection agency had issued an order against a major supplier of Exam/SU gloves to Ansell, preventing the gloves being imported into the US.
Consequently, ANN has downgraded its FY22 EPS guidance by 27% at the midpoint from US185cps to US135cps.
But we believe ANN has not addressed the signs of structural change in the industry. By the end of CY22, global glove manufacturing capacity will have doubled within 3 years. Using only the publicly declared expansion intentions of glove manufacturers, we think global capacity will grow from about 650 billion pieces in 2019 to around 1.3 trillion pieces by 2022. This wave of competition will not recede in the short to mid-term presenting a major risk to pricing, product segmentation and return on investment across the industry. We have written twice about this recently.
Investment view
ANN’s new CEO is understandably reluctant to paint a grim picture of the company, but the massive increase in industry capacity has arrived at an inopportune time. COVID-19 may end up doing more damage to ANN than the benefits earned through FY21. The company noted that it had not yet factored in any further potential impact from the Omicron variant beyond what is already known.
We see no near term catalyst for recovery with on-going COVID and shipping issues that are hampering ANN’s efforts.
ANN is due to report its 1H22 result on 15 February and the details may provide further insight into the current situation and the outlook.
We placed a Sell recommendation on ANN on 20 September 2021 at A$34.65 per share. The share price has fallen 22.7% since that time but we maintain our Sell recommendation.
