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	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 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.)