Ansell: 1H soft - suffering from a case of long COVID

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
16 February 2022, 11:30 AM
Sectors Covered:
Healthcare

  • Ansell's (ASX:ANN) 1H22 was pre-released so devoid of major surprises, with underlying earnings -24% and OPM -460bp, albeit sales grew c8% on favourable pricing and product mix.
  • Multiple headwinds impacted margins and profitability, from softer demand for Exam/SU gloves, coupled with higher associated inventories, to manufacturing disruptions and labour shortages to higher freight costs.
  • While these appear to be COVID-19-related and thus, temporary as reflected in a stronger 2H as implied by reiterated FY22 guidance, short term uncertainties (eg omicron; Exam/SU demand/pricing trends and halted US imports from top 5 supplier; normalisation of inventories; logistic costs) remain and keep us guarded.
  • Our FY23-24 estimates move lower, with our DCF/SOTP price target decreasing to (login to view). Hold.

Event

1HFY22 results were pre-released so of little surprise, with EPS US$0.61 (-26.5%, -32.8% in cc) on sales US$1,009m (+7.6%; +7.6% in cc; organic +7.5% in cc). 

GM fell 860bp to 27.3%, on COVID-19-related manufacturing disruptions, labour shortages and higher freight costs, with SG&A expenses tightly controlled (-16%), resulting in EBIT US$111m (-31% in cc) and OPM contracting 460bp to 11.0%. 

Underlying net profit US$77m (-27.1%, -33.5% in cc), equated to EPS US$0.61 (- 26.5%; -32.8% in cc). 

OCF turned negative (-US$22m), reflecting reduced profitability, payment of variable employee costs and increased WC, with a 27% fall in DPS (US$0.24) and cash conversion c60% uplift in the dividend (US$0.24; 40% payout ratio) 

FY22 guidance was reiterated targeting EPS US$1.25-1.45 (-35% to -24%).

Analysis

The Healthcare division drove top line growth (sales +15%), on the back of solid gains from Surgical and Life Sciences, with Exam/SU pricing up on pcp, but margins were crushed (-820bp to 10.1%), on lower volumes/higher COGS (US$20m hit), manufacturing disruptions (US$5m hit) and higher freight costs. 

Industrial division organic sales fell 3%, as Chemical growth was offset by Mechanical losses, with price increases, favourable mix and lower SG&A holding reported margins flat (14.9%), despite manufacturing disruptions (US$5m), but FX was supportive, as cc margins fell 150bp to 13.4%.

Management noted reiteration of prior guidance (EPS US$1.75-1.95; -9% to +2%) at Nov-21 AGM was “overly optimistic” as softer Exam/SU glove demand, labour shortages, and supply chain delays were not fully realised and now sees Exam/SU prices and costs declining toward pre-COVID-19 levels in 1HFY23 with US$10-20m impact to margins given a normal 3-month inventory lag. 

While the majority of 1H headwinds appear COVID-19-related and so should be temporary and reiterated guidance points to a stronger 2H, plenty of short-term uncertainties remain (eg omicron; Exam/SU demand/pricing trends as well as halted US imports from a top 5 supplier; timing for normalisation of inventories; and ongoing logistic delays).

Forecast and valuation update

FY22 NPAT rises modestly, but FY23-24 falls up to 7.5% mainly on lower margins.

Our blended DCF, SOTP valuation decreases to (login to view).

Investment view

We expected management to steer through slowing demand for PPE and COVID-19 disruptions, but the trajectory of that decline has been more rapid and impacts more long lasting, with visibility on recovery uncertain and difficult to forecast.

Price Catalyst

▪ FY22 results 23 Aug-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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