The latest Mid-Year Economic and Fiscal Outlook (MYEFO) reinforced the growing threats to the economy in 2016 as government revenue slows and debt rises. It also highlighted the need to maintain a defensive, yield-focused approach to share investing.
Although big miners, such as BHP Billiton, are approaching value territory, it is too soon to chase cyclical growth stocks. Among larger stocks, my preference has been utilities and Australian Real Estate Investment Trusts (AREITs) that offer reliable yield.
During the latest market rout I have searched for beaten-up industrial companies that lead their sectors, have reasonably defensive earnings and decent yield. Stocks that have little glitz or glamour, but provide basic products for consumers.
Asaleo Care is an example. The maker of personal-care and tissues products has been belted in the past six months for no obvious reason. After peaking at $2.09 in September 2014, Asaleo has slumped to $1.55 and now trades below its float issue price.
Chart 1: Asaleo Care
To recap, Asaleo listed on ASX in June 2014 through a $655 million Initial Public Offering at $1.65 a share. The maker of female, incontinence and baby hygiene products was one of that year’s largest floats, its IPO closed oversubscribed, and its share price rallied after listing.
Asaleo’s defensive qualities and market position attracted investors. Its key brands include Libra in female hygiene, Sorbent in tissues, and Handee in paper towels. It has the number one or two brands in most of its segments in Australia and New Zealand. The tissues division contributes about two-thirds of revenues.
Although its products are consumer staples, Asaleo’s strong brand portfolio provides some sustainable advantage and higher profit margins. Customers tend to stick with trusted brands, particularly in hygiene products, and are less affected by cheaper private-label brands or as price sensitive.
Asaleo reported a solid first-half result for FY15. After-tax net profit rose 15.2 per cent to $32.5 million, in part because of good cost control and efficiency gains. Its capital-investment program in its tissue-products business is reducing its cost of sales and offsetting headwinds from unfavourable currency movements on pulp prices.
Asaleo’s guidance was for low to mid-single-digit growth in after-tax profit. A bigger surprise was the announcement of an on-market share buyback of up to 10 per cent of shares (up to $100 million) over 12 months. The company clearly believes its shares are undervalued.
Asaleo has four appealing aspects. First, its strategic initiatives to innovate and differentiate existing products, add new ones, and improve efficiencies are working. They need to. Higher US dollar pulp prices, which hurt Asaleo’s pulp-sourcing costs, are a key threat to earnings. It is running hard to offset cost rises through efficiency gains.
Second, Asaleo can shift more of its product mix towards higher-margin incontinence and baby hygiene products. Incontinence care sales rose 9.6 per cent in the first half and its baby-care sales, through the Treasures brand, rose 4.4 per cent. Lower sales of its private-label products are good for Asaleo’s margins and profits in the longer term.
Third, an ageing population and people spending more on branded baby products are tailwinds for Asaleo’s personal-care division. It is no high-growth company, but has enough levers to maintain and improve its market share and margins, and find new markets here and in the Asia Pacific for its products.
And fourth, Asaleo has a solid balance sheet and is highly cash generative. Its defensive characteristics are even more appealing in a sluggish economy and volatile sharemarket, provided it can offset the risk of a higher US dollar increasing its input costs.
The key question, as always, is valuation. At $1.55 a share, Asaleo is on a forecast Price Earnings (PE) multiple of 11.8 times FY16 earnings, consensus analyst estimates show. A trailing PE of 12 is not excessive for a consumer staples company that dominates its product categories and owns some of the best-known personal-care brands in the Trans-Tasman.
Four broking firms that cover Asaleo have a buy recommendation, according to consensus estimates. A median share-price target of $1.95 implies it is undervalued at the current price.
A forecast dividend yield of about 6 per cent, expected to be partially franked from September 2016, is another attraction. The dividend should be reasonably reliable given Asaleo’s defensive qualities, balance sheet and cash-generative qualities.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at December 15, 2015.