Asaleo is a high-quality defensive stock, with a very sound yield. In its first full-year, CY15, the stock is expected to pay a yield of 5.2%, but unfranked because of historical tax losses.
Stock market investors are always looking for good defensive assets – companies that can ride out the ups and downs of the economy. They don’t come much more defensive than the recently listed Asaleo Care (AHY). Even when economic times are tough, people don’t go without toilet paper, nappies and feminine hygiene products.
Asaleo Care, which listed on the stock market in June, makes a range of personal hygiene products, including Sorbent toilet paper and Libra feminine hygiene products. The stable of products also includes the TENA range of incontinence hygiene products, Handee and Tuff Mate paper towels, Deeko tableware, Purex and Orchid tissues, Treasures nappies and Tork professional hygiene products.
Previously called SCA Hygiene, the company was jointly owned by Sweden’s Svenska Cellulosa Aktiebolaget (SCA), with a 50% stake, private equity group Pacific Equity Partners (PEP), with 49.5%, and management. SCA – a global hygiene and forest products group – built up the business after acquiring parts of the Carter Holt Harvey forest products business in 2004. It retains a 32.7% stake after the float, while PEP has sold out: PEP received $320 million for its 49.5% stake, for which it paid $250 million in 2011.
Asaleo Care’s manufacturing and distribution footprint extends across Australia, New Zealand and Fiji with five manufacturing facilities (four owned and one leased) and seven leased distribution centres. The largest manufacturing site is located in Box Hill, Australia, which makes both consumer tissue and professional hygiene products.
The second-largest manufacturing site is in Kawerau, New Zealand, and makes consumer tissue and professional hygiene products.
The feminine hygiene and incontinence hygiene products are manufactured in Springvale, Australia, while the baby hygiene products and serviettes are made in Te Rapa, New Zealand. Asaleo Care also imports and converts consumer tissue and professional hygiene products at its Nakasi facility in Fiji.
Asaleo sells the bulk of its products – 69% – to retailers, such as Coles, Woolworths, and Metcash, with the rest of its sales classed as business-to-business: these go to major distributors, hospitals, aged-care facilities and large companies, including major fast food chains and distributors such as Staples and OfficeMax.
The company will report on a calendar-year basis. The Asaleo prospectus forecast CY14 revenue of 642.2 million, up 2.7% on $625 million in CY13, and net profit of $70.6 million, up 14.8% on the $61.5 million earned in 2013. On the downside, there is about $300 million of net debt.
Asaleo was floated at $1.65 a share – in the middle of its indicative range of $1.55 to $1.80 – and has subsequently moved to $1.88. Priced initially at 14.25 times earning and it is now trading on 16.2 times 2014 earnings – or 14.6 times FY15 earnings.
Asaleo’s earnings have improved over the last three years as a result of sales growth, investment in manufacturing plant and cost-cutting – including reducing staff levels by about 10%. According to the prospectus, net profit after tax grew from $31.5 million in CY11 to $61.5 million in FY13, and is forecast to hit $70.6 million on the pro forma CY14 estimates.
The sales story has not been as spectacular: revenue has moved from $617.3 million in CY11 to $625.1 million in CY13, and it is expected to lift by 2.7% to $642.2 million this year. However, the earnings margin has improved from 13.9% in CY11 to 19.9% in CY13 and is projected in the prospectus to come in at 21.8% this year. At least one broker, Citi, believes the earnings margin can move as high as a 23% peak by 2015, but expects that to be a peak.
Central to the margins holding up is Asaleo’s ability to maintain its pricing power, given that more than two-thirds of its sales come from Woolworths and Coles. Other suppliers tell war stories of the constant pressure they come under to maintain their margins in the supermarket: Asaleo will rely on its strong position of holding the number one or two brands in its large categories.
Asaleo is a high-quality defensive stock, with a very sound yield. In its first full-year, CY15, the stock is expected to pay a yield of 5.2%, but unfranked because of historical tax losses. AHY has moved smoothly to a 23% gain on the stock market, but there could be more to come: the analysts’ consensus target price on the stock – at $2.08 – gives a further 10.6% of room to move. That is not bad for a defensive play built around the supply of household necessities.
