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 carry 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 a 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||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.
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):
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Kimberly-Clark (KMB): 21
Procter & Gamble (PG): 23
Smith & Nephew (SNN – ADR): 26
Hengan (HEGIF – ADR): 20
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 a long-term investor and takes strategic positions and own their holdings for a very long time – usually decades. Management and board have 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 in 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.)