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Recession, Destocking Cloud Ansell’s Outlook

Australia | Nov 15 2022

This story features ANSELL LIMITED. For more info SHARE ANALYSIS: ANN

Ongoing distributor destocking ahead of a potential economic downturn is posing threat to Ansell’s earnings assumptions. 

-Uncertain global economic outlook and distributor destocking pose risk to Ansell’s earnings outlook
-Earnings guidance narrowed to lower half of previous range
-Healthcare business largely expected to remain resilient 

By Danielle Austin

Ansell ((ANN)) has warned of downside risk to its full year revenue guidance, given growing concern around the global economic outlook. The company had previously warned around half of its portfolio is sensitive to the economic cycle, and performance appears to have been impacted by suppliers looking to address oversupply in preparation for a potential global economic downturn. 

Given destocking and an uncertain outlook, the company anticipates it is more likely it will achieve earnings in the lower half of its previous FY23 guidance range of 115-135 cents per share. Moderating cost inflation and a lower tax rate are expected to partially offset the impact on earnings. 

The company believes covid-driven distributor destocking is not yet finished, noting distributors continue to reduce inventories of exam gloves and chemical protection clothing. While expected to be temporary, ongoing destocking is anticipated to impact on near-term earnings and remains a risk to revenue guidance.

The industrial division is expected to account for 44% of full year revenue, comprising a 63% of contribution from its mechanical segment and 37% of its chemical segment.

While industrial activity has largely remained favourable, the market remains cautious on the impact of recessionary risk later in the fiscal year. The company’s healthcare division is anticipated to account for 56% of full year revenue, and has continued to benefit from strong growth in its surgical segment.

Uncertain outlook translates to mixed bag from brokers 

Brokers are largely uncertain on Ansell’s outlook, citing a lack of visibility and factors outside of the company's control. Three of FNArena’s database brokers are equivalent Buy rated on Ansell and two are equivalent Hold, with an average target price of $29.15 ranging from $24.14 to $32.00. 

Noting end user demand for Ansell’s products has remained largely resilient to date, Macquarie (Outperform, target price $28.85) warns recent data could suggest a moderation of this trend.

The broker believes recovery is ahead for the company’s industrial segment, and that healthcare can remain resilient. Macquarie considers the medium-term outlook for Ansell to be favourable, with risks largely tied to the macroeconomic outlook.  

Ord Minnett and Citi (both Buy, both with a target price of $32.00) both cut forecasts off the back of Ansell’s update. Ord Minnett finds the update to highlight challenges facing Ansell that remain out of the company’s control, including the threat of a recession, currency headwinds, rising inflation and oversupply.

Citi warns volatility is likely to remain a risk for the coming year. While Citi has cut its earnings per share forecast -3% each year through to FY25, Macqurie has taken larger -6% and -10% cuts to its FY23 and FY24 assumptions. 

Despite its Hold rating, Morgans (target price $24.14) highlighted a more favourable cost environment and industrial activity as positives.

According to this broker, management continues to steer the company through slowing demand, ongoing covid disruptions and recessionary fears, but notes a lack of visibility around full recovery.

Similarly rated, Morgan Stanley’s (Equal-weight, target price $28.77) earnings assumptions for the current fiscal year are below consensus, and the broker prefers to remain on the sidelines given the uncertain outlook.

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