Ansell: Improving, but not yet firing on all cylinders
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 24 August 2022, 9:00 AM
- Sectors Covered:
- Ansell's (ASX:ANN) FY22 underlying results were in line with guidance but mixed, with lower organic sales and GPM compressing, but higher than expected profit on considerably lower SG&A and tax.
- Margins and profitability were impacted across multiple fronts, from selling high cost Exam/SU inventory and COVID-19 manufacturing shutdowns to labour shortages and increased raw material as well as elevated freight costs.
- While 2H saw some improvements in these items, the business is yet to fully recover, with a wide guidance range reflective of many ongoing challenges.
- We adjust FY23-24 estimates materially lower and introduce FY25 estimates, with our DCF/SOTP price target decreasing to (login to view). Hold.
FY22 adjusted earnings were mixed (but in line with guidance), with higher than expected EPS US$1.39 (-32% in cc; guidance US$1.25-1.45; consensus US$1.26; Morgans US$1.30), helped by lower tax (-160bp; 20.3%) and excluding US$17m NRIs with shutting down Russian ops (reported EPS US$1.25), but on lower sales US$1,952m (-2% in cc; organic -2.2% in cc; Morgans US$2,209m).
GPADE (GPM including distribution costs) fell 680bp to 28.9%, due to outsourced Exam/SU products sold at lower prices, higher input costs and lower productivity, but modest SG&A expenses (-21%; 16% sales, -349bp) offset the hit to EBIT (US$245m, -28%; -32% in cc; ex- US$17m NRI) and margins (-410bp to 12.6%).
OCF grew 132% to US$114m, on improved WC, cash conversion (90% vs 61%) and lower capex (-21%; US$65m), supporting the final dividend (-28%; 31.3c).
FY23 guidance: EPS US$1.15-1.35 (+7-26%; rebased FY22 US$1.07, ex US$0.058 discontinued Russian ops, FX headwind US$0.254).
Healthcare (sales US$1,190m, -2.1% in cc) continued to be negatively impacted by lower Exam/SU volumes and prices on waning COVID-19 related demand, despite good gains across Surgical and Life Sciences, with margins crushed (- 740bp to 12.7%), on lower volumes/higher COGS, manufacturing disruptions and higher freight costs.
Industrial organic sales fell 1.9% (US$763m), as gains in Mechanical were offset by lower sales from Chemical Protective Clothing as COVID-19 related demand fell, with margins down 480bp to 14% despite passing though price increases in an attempt to offset higher input and logistical costs.
Encouragingly, GPADE margins appear to be on the mend (1H 27.3% vs 2H 30.6%), with management confident price increases can offset higher raw material and freight costs, and Healthcare OPM is moving in the right direction (1H 10.1%, 2H 15.6%), with differentiated products helping mix and Exam/SU inventory costs and pricing normalising (expected to be earnings neutral in FY23).
However, organic sales growth softened sequentially (1H +7.6%; 2H -12%) and Industrial OPM weakened (1H 14.9%; 2H 13.2%), with many ongoing challenges (e.g. Exam/SU demand/pricing dynamics; inventory normalisation; unfavourable macros; FX headwinds; operational inefficiencies; and increasing SG&A), reflective in the wide guidance range (NPAT +7-26%).
Forecast and valuation update
We materially lower FY23-24 earnings, mainly on higher opex, net interest and tax.
Our blended DCF, SOTP valuation decreases to (login to view).
While management continues to steer through slowing PPE demand and COVID-19 disruptions, visibility on a full recovery remains uncertain and difficult to forecast.
AGM 10 Nov-22; Sustainability webinar 28 Sept-22.
Lower volumes than expected; limited pass-through pricing; modest gains from manufacturing efficiencies; margin compression; regulatory intervention; market share loss; risk from acquisitions/divestures; and unfavourable FX.
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