A hygiene and health giant hiding as a forest products company
Sweden's Svenska Cellulosa Aktiebolaget or SCA dates back to 1929 as a holding company for ten forestry businesses. Over the proceeding decades, SCA began acquiring various hygiene businesses although they remain the largest private land owner of forest land in Europe holding roughly 2.6 million hectares (6.4 million acres). Separating these two businesses made sense and hopefully will allow the true value of each to be realized.
How does Essity look going forward?
In 2016, Essity (OTC:ESSYY) accounted for 86% ($11.5 billion) of SCA's total revenue so while SCA was originally founded as a forest products company, in reality, it was a health and hygiene business and had been for many years. It earned around $480 million and generated $790 million in owner earnings last year.
The Company's reach extends into roughly 150 countries and is recognizable under names like TENA (diapers) and TORK (toilet paper) among others. Simply put, it has a very large presence in the tissue and diaper market globally. They are the biggest seller of tissue in Europe and the largest and fourth largest seller of adult and baby diapers in the world. While these businesses certainly aren't glamorous, they have excellent long-term economics and are entrenched in their respective markets.
Make no mistake about it though, these are competitive industries dominated by Procter and Gamble, Johnson and Johnson, Kimberly-Clark, Unicharm, Ontex, Reckitt Benckiser, and Essity. Any smaller players in the industry are simply bought up by one of the big boys.
The chart below shows Essity's market position in each of their business segments:
|Essity market positions 2016||Worldwide||Europe||North America||Latin America||Asia|
Source: Essity website
Unglamorous but predictable and stable growth
The Company noted that as of 2016, the size of the global health and hygiene markets was roughly $125 billion. This further breaks down into the following worldwide markets:
- Personal care $63 billion ($26 billion baby diapers, $14 billion feminine care, $10 billion incontinence products, & $13 billion in the medical solutions.)
- Tissue $61 billion
Not surprisingly, the personal care segment will experience its largest growth in emerging markets where penetration rates for things like diapers and feminine care products are a fraction of their mature counterparts. Essity noted that consumption rates for baby diapers in Asia and incontinence products are only 1/5th and 1/6th per capita compared to Western Europe. This holds accurate for the tissue segment as well as tissue consumption in Eastern Europe is only about 1/3rd that of their Western European neighbors.
This is not an industry where rapid growth will be the norm but it will be stable and growing. The market for baby diapers is expected to reach $64 billion globally by 2022 up from $26 billion today.
A segment that could experience high growth however over the next two decades is for incontinence products (adult diapers among others) due to the baby boomer generation as well as those a bit younger suffering from bladder control issues. Yes, not sexy stuff but a problem more people have than you might think. This also happens to be a segment Essity dominates as the largest seller of incontinence products in the world. In fact, it is estimated that adult diaper sales will surpass revenue from baby diapers in the U.S. over the next decade. This is already happening in countries where a large percentage of the population are senior citizens like Japan.
Worldwide, the adult diaper market is expected to grow at an annual rate of about 5.6% to 2021 but past that growth revisions will likely be racheted upward.
With respect to the tissue market, Essity is currently the worlds second largest supplier. This segment is broken down into napkins, toilet paper, kitchen rolls, etc. In Europe however they are the market leader holding a market share roughly double that of their next largest competitor according to the company.
In North America, Essity estimates that they supply every second napkin in the fast food industry as well as are the second largest supplier in the region.
|Market position 2016||Worldwide||Europe|| |
Technavio estimates that the global tissue market will grow at a CAGR of about 4.5% to 2019.
The figures go on and on but the big takeaway is that Essity is a big player with solid positions in the markets in which they compete. Certainly one of those industries that people generally don't think too much about but whose products could very well be in your house or at a restaurant you are eating at.
In April, a few articles surfaced stating a group of private equity buyers had put in a bid to buy Essity for $22 billion. In the article listed here, a union representative of the board for Essity is quoted as telling Reuters "I have not seen anything, heard anything, and I have no comment." Whether or not this was just the rumor mill churning is tough to say. Granted we do not know the inputs used but I'd be willing to bet that if the private equity offer was real, the bidders did their homework to arrive at the $22 billion offer.
In the same article it was noted that analysts at UBS and Handelsbanken Capital had also valued Essity between $22 and $24 billion. We have three different sources arriving at a similar value (if the private equity bid is to be believed) so it seems as good a figure as any. If these figures are in the ballpark of reality, then Essity is currently trading for a slight discount. Another factor of relevance is that businesses like these generally command premium multiples given their market dominance and rarely (if ever) will be valued at single digit P/E, P/FCF, etc.
Kimberly Clark is probably Essity's closest competitor as the hygiene units of P&G and Johnson and Johnson are just one piece of those vast businesses. At year end 2016 both Kimberly Clark and P&G had roughly $18 billion in revenue from their hygiene segments compared to Essity's $11.5 billion. Essity produced free cash flow of about 8.5 billion Kronas or 12.18 a share during 2016. This works out to a P/FCF of close to 20 compared to Kimberly Clark which has a current P/FCF of about 19.
Essity has issued class A and B shares with the A shares carrying ten votes and the B shares carrying one vote. They will be issuing a dividend but have yet to announce a date as well as the amount.
Given that Essity is currently trading for a slight discount makes it quite interesting but I'm still going to wait on the sidelines for the time being for the simple reason that it might follow the not uncommon path of many spin-offs and get sold off by shareholders unaware that the business is now made up of two entities.
My approach will be to wait awhile to see how it trades and establishes a base of sorts around that $22 billion figure before making any buy decisions.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ESSYY over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I will be a buyer at the right price for the Swedish listing as the OTC version will likely have very little volume for some time.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.