Essity – The Swedish Consumer Staple

Essity is a Swedish consumer staple listed on Stockholm Stock Exchange with the ticker Essity. It has dual share-listing where the A-shares carries more voting rights than the B-shares.

Essity has only been listed a few years after it was spun off from SCA into a separate entity. SCA continues to operate as a forest products company – SCA is huge forest owner. SCA’s hygiene business was a completely different business than forest operations and thus the spin-off.

The name Essity comes from combining the words “Essentials” and “Necessity”. This sums up pretty well the products of Essity: hygiene and health products, which we all need in our daily lives. The company is divided into three segments: Personal Care, Consumer Tissue and Professional Hygiene. The most famous brands include Libresse, Tork, Zeva, Edit and Tena. The revenue is split like this:

Sales Emerging Adjusted Average Adjusted Organic net Capital
sales share market share EBITDA organic growth EBITDA margin sales in EM employed
Personal care 48 340 37% 37% 6 746 4% 13% 7% 39%
Consumer tissue 49 904 39% 47% 5 321 3% 9% 10.70% 41%
Professional hygiene 30 731 24% 20% 4 463 2.50% 15% 9.90% 20%

The Professional Hygiene segment is the most profitable and has over 15% return on capital employed. Clearly growth is much higher in emerging markets (EM), perhaps as expected.  Growth in developed markets is pretty low and expected to be so.

Valuation:

Compared to other global consumer staples I would say Essity is valued on the cheap side. EPS for 2019 was 13.2 SEK which equals a current P/E of about 21, or an earnings yield of 5%. The EPS consensus is an increase of EPS in 2021/2022 , which lowers the forward PE to about 18-19.

The valuation is lower than international peers (according to Morningstar, forward P/E):

Kimberly-Clark (KMB): 21

Procter & Gamble (PG): 23

Smith & Nephew (SNN – ADR): 26

Hengan (HEGIF – ADR): 20

Conservative management:

As is typical for Swedish companies they are managed in a very conservative way where the main focus is long-term value creation. I have previously written about why it makes sense to invest in The Nordic region.

The biggest owner, 9.5% of the shares and 29.5% of the votes, is Industrivärden AB (The Norwegian Wealth Fund is the second biggest – a passive investor). Industrivärden is long-term investor and takes strategic positions and own their holdings for a very long time – usually decades. Management and board has a low ownership.

The case for investing in Essity:

  • A strong mix of brands.
  • A solid long-term major shareholder in Industrivärden AB, which has a proven track-record in capital allocations.
  • Based in Sweden, which has a long and proud history of innovation and international industrial ventures. My opinion is that this is often a neglected factor about the Nordic region.
  • Essity has of course a long track-record before it was spun-off from SCA.
  • Recession resistant. Essity is one of the few stocks that only suffered a 10% drop in March 2020 during the pandemic. The beta to the market is a low 0.5, thus it “lives a life of its own”. Most of their products are necessities, and hence more resistant to economic shocks.
  • The Nordics are an expensive region to operate from, thus most international operations are very competitive.

Essity is a conservative investment that will not set the world on fire. Most likely it will preserve your purchasing power and then some. I expect high single digits return over the next decade: 2% dividend yield and 5-8 EPS growth, mainly tailwind from emerging markets. I anticipate the main stock indices to return much lower than the prior decade, and I expect Essity to outperform.

 

Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 7th of July 2020.)

 

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