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Ansell’s trading update sent shares down over 10% yesterday. The catalyst was a negative trading update out of the personal protection equipment maker – but was the update really as bad as the share price decline suggested?
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Not the first time Ansell gave a negative update
It is important to note that this is not the first time Ansell has declined due to a negative financial update.
Back in February, at its 1HY23 results, it cut its FY23 EPS guidance from US$1.15-US$1.35 to US$1.10-US$1.20. The catalysts were PPE sales returning to pre-pandemic conditions and negative forex conditions.
For comparison’s sake, the company achieved earnings per share of US$1.386 on an adjusted basis and US$1.252 on a statutory basis (after accounting for the impact of the Russian exit).
Ansell’s trading update
Ansell now expects its FY23 EPS to be US$1.17-$1.18. This is within the middle of its updated guidance range but well in the lower range of the original guidance range.
Management also advised that Industrial GBU sales were US$750m, slightly down from US$762.5m a year earlier. Healthcare sales were down from US$1,189.6m in FY22 to US$900m.
The catalyst was customers reducing their inventory after building up excess inventory during the pandemic.
Ansell also provided general guidance for FY24. Although it expected forex headwinds to moderate as well as a 21% tax range (compared to 22.5%-24.5%), the company expected distributors would continue to reduce their inventories.
Shares fell by over 10% yesterday and are down over 35% from their 2021 peaks.
Ansell’s plan to turn things around
Shares fell despite the company announcing new initiatives that it claimed would improve EPS growth. These included temporarily slowing production of finished goods and manufacturing staff cuts.
It said these investments would deliver annualised pre-tax cost savings of $45m by FY26. These initiatives would cost $40-50m in FY24 but be fully cash funded from the associated working capital production.
It also announced an acceleration of its digitisation strategy, promising $30-35m worth of new IT investments, the majority of which would be spent in FY25 and FY26.
It estimates adjusted EPS would be US$0.92-$1.12 while statutory EPS would be US$0.57-0.77, both of which would be down on FY22 and FY23.
Is Ansell a buy now?
We don’t think it is, at least for the next 6-12 months and potentially beyond that.
You could argue the company is oversold at the moment. But it is unlikely to recover until EPS starts to recover. And this won’t be happening until at least 1HY25.
Even then, EPS will not recover past FY22 levels until FY26 according to consensus estimates.
Speaking of consensus estimates, the consensus price is $18.70, a further 20% discount to the current share price chart.
So there could well be more downside to come before there is any upside.
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