Australia | Aug 13 2014
-Strong margin, profit increases
-Attractive for yield investors
-Predictable sales but competitive risks
By Eva Brocklehurst
Personal hygiene product manufacturer Asaleo Care ((AHY)) listed on the ASX in June. The company has a swag of leading hygiene brands in Australasia which cover non-discretionary everyday items, such as tissue. The major supermarkets represented 63% of Asaleo Care's 2013 net sales.
Three initiations on FNArena's database have resulted in two Buy ratings and one Hold. The consensus target is $2.08, suggesting 10.5% upside to the last share price. The dividend yield on 2014 and 2015 forecasts is 2.5% (half year) and 5.3% (full year) respectively.
Macquarie observes the market in which the company operates may be highly competitive but is also relatively stable and defensive. Growth in the business is driven by population increase, favourable demographics and increased per capita consumption. Barriers to entry are relatively high and private label penetration low. Macquarie also likes the ability to leverage major shareholder Svenska Cellulosa Aktiebolaget's (SCA) global scale and expertise. The company has a $115m capital investment program underway to improve the operating performance of tissue manufacturing operations and intends this to be completed by the end of the year. The increase in operating efficiency and lower production costs have already driven a substantial uplift in earnings. As a result, Macquarie believes the company is in a strong competitive position to drive growth in the tissue segment.
BA-Merrill Lynch highlights predictable sales, margin realisation and earnings growth, which will be further underpinned by new product launches and better efficiencies from the tissue manufacturing capex program. The broker expects profit to increase by 15% in 2014 and 7.5% next year. Return on investment capital is forecast to bet 12.9% this year, increasing to 14.4% next year. As working capital and cash outlays are now finalised, the broker expects free cash flow to rise to $136.9m in 2015, from $48.7m this year.
There has been a dramatic improvement in margins since 2011, Citi notes. The broker believes the earnings margin will peak in 2015 at 23% and fall to 22.4% by 2017. Further upside to earnings is possible, but Citi suggests this would require a weaker Australian dollar. Still, the stock is attractive for yield investors and should benefit in the short to medium term from a capex holiday and tax breaks in Australia. Meanwhile, dividends are covered by free cash flow and the balance sheet is expected to de-leverage rapidly.
What are the risks? For Citi these encompass competition, which is particularly fierce in the tissue category. Pulp prices, a major input, are also volatile. Private label manufacturing could be a short term opportunity but the broker suspects, longer term, this could threaten margins. The broker believes the company lacks growth to satisfy those investors looking for capital appreciation, but management has plenty of free cash to invest and further afield strategies may be revealed which accelerate growth.
Asaleo Care maintains five main product categories: feminine; incontinence; professional; baby; and consumer tissue. Brands include Libra, Treasures, Tena (licensed from SCA), Sorbent, Tork (licensed from SCA) and Handee. Excluding tobacco products, toilet rolls are the largest non-food category item for supermarkets. In 2013, 51% of Asaleo Care's sales were generated from personal care and 49% from tissue. The company has operated for over 80 years and was acquired by SCA in 2004 with Pacific Equity Partners acquiring a 50% stake in 2012. On listing, SCA retains a 32.5% stake and has entered into a number of long-term product, technology and licensing agreements. Asaleo Care is headquartered in Box Hill, Victoria and has five manufacturing plants in Australia, New Zealand and Fiji.
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