The share price of Asaleo Care (ASX:AHY) is currently near all-time lows. Since our recent review of the Company’s fundamentals in early January 2018, the share price has continued to weaken from around $1.50 to levels closer to $1.30. Following the recent release of results for FY17, are current share prices now low enough, and is the yield high enough, to consider it as an investment?
Asaleo Care is a leading personal care and hygiene company operating in Australia, NZ and Fiji. The Company manufactures consumer tissues and hygiene products and distributes these products through retailers, distributors and directly to corporate accounts.
The Company has two operating segments: Personal Care and Tissues. Products within the Personal Care segment include incontinence hygiene products, feminine hygiene products (pads, tampons, liners) and baby hygiene products (nappies/diapers). Collectively they account for around half of group earnings.
The recent results for Asaleo Care
Underlying EBITDA for FY17 was $124.3m. This was in line with downwardly-revised Company guidance of between $124-125m provided in mid-December last year. Asaleo Care faced difficult conditions in FY17, characterised by under-performance in the Feminine hygiene category of the Personal Care segment. This was where competitive pricing impacted sales volumes. Until October 2017, Asaleo Care was locked into fixed Every Day Low Pricing (EDLP) arrangements. The EDLP arrangements were with its key national retailer accounts (i.e. supermarkets). The EDLP strategy creates permanently lower retail selling prices. It does this by rolling all supplier trade spending used to fund temporary price reductions, into lower regular price.
Aggressive price discounting by key competitors compounded this arrangement, which made Asaleo Care’s product uncompetitively priced. Since November 2017, the Company has exited out of its EDLP arrangement. It has then recovered lost volume market share in the feminine hygiene category. Asaleo Care has also noted a reduction in the frequency and size of discounting activity from its major competitor in the feminine hygiene category.
Notwithstanding the improved conditions in feminine hygiene, the Personal Care segment continues to face challenges in the baby care category. This is where Asaleo Care is in competition with Kimberly-Clark, who hold a share of ~70% of the Australian baby hygiene market, via its Huggies brand. Huggies is also a stronger sales performer than Asaleo Care’s Treasures brand.
Further, the Tissues segment faces the challenge of private label expansion, which still remains low at ~10%. The other challenge is margin pressure from supermarkets stocking private label brands. The prices of these brands are then heavily discounted prices. The final challenge has been rising pulp and energy costs in FY18.
The fundamental view
The Company has provided EBITDA guidance for FY18 of between $113m and $119m. While this represents a material reduction on the FY17 EBITDA figure of $124.3m, the market is likely to continue to remain cautious on Asaleo Care, given:
- Two recent consecutive downward revisions to full-year guidance, with the Company having previously downgraded guidance for FY16 in July 2016 on the basis of intense price competition in both segments.
- The upcoming departure of the Company CEO in May 2018. While an interim CEO is currently in place, the market awaits any potential new strategies/financial targets once a new CEO is installed.
While the share price is currently supported by an attractive yield of ~7% (50% franked), it is worth noting that a further deterioration in earnings (at the EBITDA line) is expected to impact the expected dividend going forward. This is given the increase in gearing (on a net debt to EBITDA basis) to 2.25x as at 31 December 2017 and towards the upper end of the target range of between 1.5x and 2.5x.
Chart for Asaleo Care
The share price has gravitated back towards the 2016 low. There is a chance that it could find some short-term support here and bounce. However when we look at the way it has traded over the last year, the downwards movements are still very impulsive. They are also on high volume. This tells us that the bears are still in control and we are likely to see Asaleo Care fall to new lows.
Michael Gable is managing director of Fairmont Equities.
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