Ansell Sans Protection From Covid, Soft Glove Demand

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Medical glove and safety protection solution company Ansell issued a notable downgrade to earnings ahead of first half results, as the company feels the continued pressure of covid impact.

-Number of headwinds responsible for a significant downgrade to Ansell’s earnings guidance
-Largely covid-driven pressures, including increased costs and demand decline, have impacted margins
-Brokers note impacts should be temporary, but first half downgrade may not be the pressure peak

By Danielle Austin

Margin pressures have driven Ansell ((ANN)) to issue a -27% cut to its full year earnings per share guidance, down to US$1.25-1.45 from a previously guided $1.75-1.95 issued as recently as mid-November.

While a first half miss was widely expected, the company’s first half trading update disappointed more than anticipated. Despite the revenue result being largely as expected for the first half, the company’s underlying earnings were down -25% on the previous comparable period and margins were down -470 basis points.

Poor margins on glove inventory exacerbate covid headwinds

An accelerated decline in demand, and subsequent destocking at lower prices, for single-use gloves has placed pressure on Ansell’s earnings margins. While a demand and cost decline was anticipated, the trajectory was steeper than expected, leaving the company with an inventory purchased at higher prices being destocked at lower prices through the half and driving margin compression.

While glove sale margins seem the headline driver of Ansell’s earnings downgrade, the company has also suffered the covid pressures impacting businesses globally. Elevated costs have been driven by labour constraints as border closures, low unemployment rates and continuing covid restrictions impact on the ability to maintain a labour force, while supply constraints are expected to persist into the second half.

The company shut down a production facility in Malaysia in late January amid increasing covid cases, although company commentary suggests the facility should reopen in coming days.

Impacts look temporary according to experts

With headwinds largely covid-related, consensus among brokers is that impacts will be more temporary than structural, but Morgans warns disruptions are likely to continue to impact for an unknown duration.

Despite issuing forecast downgrades, of the six brokers in FNArena’s database currently covering Ansell, three are Buy rated or equivalent and three are Hold rated with a consensus target price of $31.25.

The only broker in the FNArena universe to issue a rating upgrade, Macquarie, acknowledged uncertainty in the coming half and in FY23 but believes its revised forecasts account for downside risk. The broker decreased earnings per share -19%, -6% and -4% through to FY24.

Macquarie had been warning for months the risks were skewed to the downside. The upgrade to Neutral from Underperform with a revised price target of $28.30 now that its thesis has been proven correct, suggests the time to be bearish on Ansell has now passed. It's a sentiment that is shared by most analysts covering the stock.

FNArena's consensus price target has fallen to $31.25 from $40.64, in response to this week's profit warning, still suggesting 17%-plus upside from yesterday's closing share price. Targets range between $26.50 (Credit Suisse) and $37.50 (Citi).

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