Ansel had a particularly poor trading update today.

More or less everything that could go wrong has gone wrong, with slower demand, supply chain disruptions, higher raw material costs and higher shipping costs.

From today’s update:

All of that led to a 10% downgrade to 1H FY22 EPS expectations ($0.61 new guidance, vs $.67c prior street consensus).

However, two new additional items of bad news have developed, namely COVID-related shutdowns, and a major supplier incurring modern slavery concerns, resulting in a lockout of US markets.

This second one is quite large, and explains the bulk of the downgrade to FY22 EPS (now $1.25 FY22, vs $1.75 FY22 guidance).

All in all it was a ~30% drop in forecast earnings. The share price reaction today is fair, to our minds, given the new news. The market hates uncertainty, and that forced labour practice concern smacks of time, cost, and complexity to resolve.

We bought ANN after the de-rate from $45 down $31, a level in which the pandemic related share price bump had been fully unwound. Below is a graph from our note from the AGM update.

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Earnings, at the new guidance of $1.25, are at the pre-pandemic level of earnings from FY19/FY20.

So both the COVID-related share price bump, and the earnings bump are now gone from the share price and from consensus estimates (below show’s today’s price graph), and the stock is comfortably below the pre-pandemic peak.

Whilst disappointing, we aren’t going to sell the stock. That potent cocktail of supply chain issues, elevated raw material costs, increased shipping costs, will eventually normalise.

As such, the incremental downside is fairly limited, to our mind.

ANN is a 3% position in the Core Equity Portfolio.

Momentum is one of the most reliable factors out there, and we are mindful of its effects, which reduces our appetite to buy more, today, given that the more detailed result itself is just a few weeks away.

However, we are quite comfortable with rebalancing back to target weight.

ANN is a high quality company, and we don’t have any long run operational concerns with the business, or with the outlook for their products. It is assuredly in the “value” category now, with a headline PE post downgrade of 13x on normalised earnings, which is a significant discount to market.

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