EUR 850.00 For Business Accounts Only

Morningstar | Investment into Advertising, Innovation and Efficiency Should Help Stabilise Asaleo Care’s Earnings

Having sold the struggling Australian consumer tissue business, fiscal 2019 will be a transitional year for Asaleo Care. We continue to forecast fiscal 2019 EBITDA of AUD 80 million, at the bottom of the AUD 80-85 million guided range. We’ve trimmed our near-term earnings per share estimates by around 3% on average, and we expect low-single-digit growth over the next five years. The trim mainly reflects slightly higher depreciation estimates, but the impact on our valuation is negligible. We maintain our AUD 0.85 per share fair value estimate for Asaleo Care. The stock currently trades at a slight premium to our fair value estimate, albeit comfortably within 3-star territory.

We forecast retail revenue to grow at a modest 2% per year on average over the next five years. This assumes a continuation of the challenging competitive landscape (particularly in feminine care) and pricing pressure. This should be partially offset by return on the increased investment into advertising, promotions, and product development. However, these additional operating costs, along with the soft macro and consumer environment (both of which are weighing on the broader retailing and supermarket industry) will constrain the divisional EBITDA margins at around the current 19% for the foreseeable future.

Going forward, the business to business, or B2B, segment will contribute around half of group EBITDA. In recent years, this business has faced major cost pressures, most noteworthy being the higher pulp and electricity prices. To mitigate this the company has invested AUD 25 million into the segment, aimed at delivering cost savings, improving quality and broadening the product range. Additionally, management has had some success achieving price increases, and a more favourable product mix will help mitigate the cost pressure in the coming years. We see earnings stabilising in this division, and from fiscal 2020 onwards the B2B segment should be able to achieve low single digit EBITDA growth.

The company has also reached an in-principle agreement with their major shareholder and technology partner, Essity. This would see the trademark and technology license agreement extended for another five years, out to 2027. This would maintain the firm’s access to technology, sales and marketing rights for the Tork and Tena brands, two of the firm’s stronger performing products, and key contributors in the B2B segment. Tork is one of the leading global brands in professional hygiene products, and while we believe most of the company’s products are commoditised, over a third of the professional hygiene sales use proprietary branded dispensing systems, which are much stickier than other products and should deliver stable earnings. Despite having access to highly reputable brands we do not assign the company a moat rating. We do not think it is in Essity's long-term interests to sell intellectual property at a price low enough to permit Asaleo to generate return on invested capital above its cost of capital over the long term.

As part of the recent strategic review, the AUD 180 million sale of the underperforming Australian Consumer Tissue business was finalised at the end of March 2019. In the interim the proceeds have been used to reduce debt, strengthening the firm’s balance sheet. We forecast net debt/EBITDA of 1.6 by the end of fiscal year 2019, towards the bottom of the target range. We think the balance sheet can comfortably cope with the reinstatement of dividends, and we continue to forecast a final dividend of AUD 3 cents per share in fiscal 2019. From fiscal 2020, we forecast the dividend payout ratio to return to around 90% of underlying earnings.