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:

Healthcare

• 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.

Event

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).

Analysis

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).

Investment 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.

Price catalysts

AGM 10 Nov-22; Sustainability webinar 28 Sept-22.

Risks

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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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.