Kimberly-Clark: Softex Paves Entry Into Large Indonesia Market And You Get A 3% Yield To Boot

Summary

• Sales have grown as COVID-19 impacted consumers stocked up on the company's essential products.
• Commodity raw material costs are expected to decline significantly this year.
• The Softex acquisition - which closed last week - paves the way into the Indonesia market - the largest economy in Southeast Asia and fourth largest country by population.
• A near 3% and a P/E significantly lower than that of the S&P500 make KMB comparatively attractive.

Note: This article was amended on 10/5/2020 to reflect a correction in stated values for the company's full-year earnings.

In early September Kimberly-Clark (NASDAQ:KMB) announced a definitive agreement to acquire Softex Indonesia for ~$1.2 billion in cash. Softex is a leader in the personal-care products sector in Indonesia - the largest economy in Southeast Asia. The price looks quite reasonable and strategically the acquisition is an obvious plus moving forward. Combined with recent sales growth, KMB's near 3% yield in a negative real interest rate environment makes the shares attractive.

Softex

Softex had sales (primarily diapers) of ~US$420 million in 2019 means the buyout was at a 3x multiple of sales, quite reasonable considering Softex had been growing sales at a double-digit rate. The two companies are an excellent strategic fit given KMB's entry into Indonesia - at 267 million people, the fourth most populous country on Earth - and the symbiotic fit of Softex's diapers business with KMB's line of Huggies, Depends, Pull-ups, and Kotex.

Note the US$420 million in Softex annual sales equate to roughly 2.3% as compared to KMB's 2019 full-year sales of $18.5 billion. So the expected increase in sales was roughly equivalent to purchase price compared to KMB's market cap (~2.4%). KMB announced the deal had closed on Thursday. Mike Hsu, Chairman and CEO, Kimberly-Clark, said:

This acquisition accelerates our growth with strong market share in key personal care categories across Southeast Asia's largest economy," said "As we move ahead, we will leverage our combined strengths in innovation and brand building while maintaining the local market expertise and advantages that Softex Indonesia has built with its strong portfolio of brands.

This is an example of why Hsu was brought in to run the company from the CEO slot in January of 2019: to enhance KMB's presence

Analyst’s Disclosure:I am/we are long XLP. 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.

I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.