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Morningstar | Asaleo Offloads Australian Consumer Tissue Business for Attractive Price, FVE Raised to AUD 0.85

Asaleo Care announced the sale of its Australian Consumer Tissue business to Solaris Paper, for an extremely attractive price. The tissue business was home to leading brands Sorbent toilet and facial tissue, along with Handee Ultra paper towel. The sale price of AUD 180 million, represents over 10 times pro forma EBITDA, although this EBITDA figure has been normalised to reflect pulp prices and trade spend more closely in line with long-term averages.

We believe this is an attractive sale price, especially compared with the firm’s recent trading multiple of 8 times fiscal 2018 EBITDA, which includes the personal care segment to which we assign a higher multiple. We had forecast earnings within the consumer tissue business not recovering from current levels, given elevated pulp and energy costs, aggressive competition, and powerful customer base, and as such had ascribed little value to this business. Accordingly, having sold the business at just above book value (and well above what we think it is worth), the transaction is around 30% accretive to our fair value estimate, which rises to AUD 0.85 cents per share. We still believe the stock is slightly overvalued, and we believe the market is overly optimistic on the firm’s ability to recover market share in the challenging personal care market.

The sale is expected to complete during the first quarter of fiscal 2019, and we aren’t expecting any major regulatory hurdles. Given the loss-making status of the Australian Consumer Tissue business, management has indicated the transaction is likely to be both EBITDA margin and EBITDA accretive. We’ve lifted our earnings estimates by around 3% per year on average, post 2019, which reflects the significantly lower net interest expense, along with the exit of the loss-making business. At the group level, we expect revenue to fall by around 30% during fiscal 2019, although the group EBITDA margin should improve to around 22%, from our forecast of 16% in fiscal 2018.

From a strategic standpoint we think the sale of the underperforming division is applaudable and puts the company in a much stronger position. The sale will reduce exposure to the major supermarkets customers (Coles and Woolworths) to less than 30% of sales. The supermarkets which will continue to wield their powerful position over suppliers, especially those selling commoditised products such as tissues or toilet paper. Additionally, the sale reduces the firm’s exposure to the volatile input costs, most noteworthy being pulp, which is currently a major headwind. The sales mix will increase revenue exposure from around 40% business to business, or B2B, to approximately 60%. This is much more favourable exposure, as the corporate customer base is much stickier, the margins are higher, and the firm will have a better chance of passing through higher input costs.

We expect the company to direct their efforts towards the personal care division, which has underperformed during recent years. The company is likely to focus on stabilising market share by increasing investment in price, marketing, research and development, and advertising, all of which we expect will push margins down to 28% by fiscal 2022, compared with our forecast of 29% during fiscal 2018.

The company also secured an agreement for a five-year extension to its licence agreement with Essity. This agreement provides technology, marketing and sales rights for the Tork and Tena brands. This is a positive, alleviating any concerns about the relationship between Asaleo and Essity, while also adding some certainty over the future product portfolio.

Upon completion of the sale we estimate net debt will fall from approximately 3 times EBITDA (which we believe was too high) to around 1 times EBITDA, which is below of management's 1.5 to 2.5 times target range. This alleviates our previous concerns that the debt levels were becoming dangerously high. While the dividend policy is still being reviewed and an update will be provided at the full year results in February 2019. Given the increased financial headroom following the transaction, we believe the firm will reinstate dividend payments at approximately 50% of earnings during fiscal 2018, returning to 90% by fiscal 2019.