Caution Required With Asaleo Care

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Several brokers have run the ruler over hygiene product manufacturer, Asaleo Care, and found the recent share price rally makes for caution regarding the outlook in FY17.

-Limited opportunity to recoup cost increases in second half
-Competitive environment unrelenting
-Upside dependent on successful launch of new products
 

By Eva Brocklehurst

Several brokers have run the ruler over hygiene product manufacturer, Asaleo Care ((AHY)), and found the recent share price rally makes for caution regarding the outlook in FY17. Most of the positives and low growth expectations appear factored into the stock.

The tissue division should enjoy lower Australian dollar pulp costs in the first half but headwinds are increasing and Macquarie suspects there is limited scope to recoup cost increases in the second half. The broker envisages no easing of the competitive environment, as industry reports suggest ABC Tissue plans further increases in capacity.

The broker updates forecasts for the personal care division, increasing the second half skew to account for timing of product releases and plant upgrades. The broker expects second half sales will benefit from the new Libra and Treasures product releases. Guidance from the AGM earlier this month suggests low single-digit growth in earnings and net profit and low-to-mid-single digit growth in earnings per share. Macquarie's revised forecasts are at the lower end of commentary.

Capital Management

The most likely near-term catalyst is capital management at the end of the year, the broker suspects. The capital optimisation program and strong cash generation is expected to result in free cash flow in the order of $85-90m and drop the gearing ratio to below 2x by the end of FY17.

Given a lack of investment options, Macquarie expects capital to again be returned to shareholders. While the headline multiples are not demanding, rising input costs and highly competitive environment mean the risks are increasing and Macquarie downgrades to Neutral from Outperform.

Citi also downgrades the stock, to Sell from Neutral, and expects a challenging revenue backdrop to result in a slight decline in earnings in FY17. The broker forecasts operating earnings (EBIT) of $100m for FY17, down -2% on the prior year. This compares with the company's goal of low single-digit growth. The shares have rallied 37% over the past three months so the broker considers the stock expensive.

The broker suspects the stock could de-rate with a weaker first half. Citi forecasts first half operating earnings down -3% and second half down -1%. The downside risks to revenue and earnings that Citi outlines include a loss of share in paper towel to ABC Tissue, which launched the Tuffy brand on Woolworths ((WOW)) shelves in March. The broker estimates this could take -$1-1.5m off revenue.

Woolworths has also given prominence to its higher-quality private-label toilet tissue on shelves as of March although, mitigating this somewhat, Asaleo Care's toilet tissue brands are being provided more shelf space. The other risk is the lapping of EDLP (Asaleo Care products move to Every Day Low Prices in major Australian supermarkets in May 2016) as a revenue risk.

Typically, Citi explains, when a product moves onto EDLP there is a lift in volume in the first 13 weeks followed by stabilisation. At the 12-month anniversary, lapping good volume growth is tough, particularly as there is rarely a new promotional mechanism. For Asaleo Care, this is further complicated by the fact a major competitor increased its promotions in response.

The broker is not all negative. Conservative views on the stock could be proven wrong if new products perform well. This includes launch of the Roll Press Go product in feminine hygiene as well as better shelf lay-out while nappy sales could rebound with new product technology and manufacturing.

Nevertheless, while the potential for upside exists from these products, the broker notes costs will be incurred first and the revenue response may take some time. Citi has a flat earnings profile over the next three years. The broker's dividend outlook is stable and a greater margin of safety is preferred in order to find value in the stock.

Credit Suisse downgraded the stock to Neutral from Outperform in April noting that stability has been largely priced into the stock, while guidance of low single-digit growth appears achievable.

There are two Hold ratings and one Sell (Citi) on FNArena's database. The consensus target is $1.63, suggesting 2.7% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 6.4% and 6.5% respectively.
 

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