† In December 2005 we flagged the risk of ongoing increases in latex prices, the key raw material for ANN, representing 15-20% of COGs. † We expected prices to plateau in 2HFY06; this has not been the case - latex prices have increased by >20% in the past few weeks.
† Supply and demand remains tight, but the upward spike is said to be a feature of recent hedge fund involvement in the rubber market.
† We expect prices to stay around current levels for the next two to three months. But, there remains a case for latex price falls on the basis of increases in supply and expectations of slowing demand for dry rubber (tyres), together with a seasonal increase in production by May 2006.
† ANN's 1HFY06 result is unlikely to be impacted; and forward purchasing may limit the impact to 2HFY06. However, unless ANN can gain corresponding price increases for gloves/condoms, we are concerned that ANN may revisit guidance for FY06, currently set at US$0.54-0.57cps; pre-sale of the SPT put, CIR forecast was at the 'bottom-end' at US$0.55cps for FY06.
† We run a sensitivity analysis - assuming a further 20% latex price increase to our latex price forecasts EPS would be impacted -2.2% for FY06 (assuming second-half impact only) and -3.2% for FY07. Our target price would fall ~2.3%, total return remains >15% for the stock.
† The buyback is expected to start post 1H results on 15 Feb 2006. We retain Buy/ Medium Risk rating; target price A$12.76ps (was A$13.04ps).
ANN Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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