As of yesterday’s close I entered a 6% position in Essity, the newly formed personal care and tissue products company. Essity was the Hygien part of SCA and was spun out of SCA earlier this year. That left SCA with forest ownership and pulp production in SCA.
I have kept SCA on the radar for a long time and it has always been the Hygien part of the company that I found attractive. After the spin-off the Essity share has traded down whereas the SCA part has continued up. I like Essity for the quality of their products and I believe there is room for Essity to increase margins to similar levels like competitors. I think they have especially strong products for growth in Asia, for example through their majority holding of Hong Kong listed Vinda. I have considered investing in Vinda instead, but I see more room for multiple expansion in Essity and also a more diversified holding (less concentrated on China).
Hi,
Thanks for the idea.
Not sure whether I can follow your thesis. Kimberly currently trading at 12 times EBITDA (22% margin) vs Essity at 18 times (11% margin)
Even an improvement from 11% to lets say 18% brings valuation down to only 11.5 times. So where do you see the upside coming from?
Hi Michael, not sure what figures you are looking at, I see Essity at 14-15% EBITDA margin, vs Kimberly as you say on 22% (although Kimberly maybe more realistically long term should be around 18%). Regarding MCAP to EBITDA, I see Essity at 13-14X and Kimberley as you say at 12X. So bringing EBITDA margins to 18% for Essity, brings multiplier down to 10 times EBITDA. This is now also after the stock has rallied somewhat.
The longer term case for holding Essity is well run company with top quality products (which should be able to command a premium pricing) in for example the tissue area.
Hi GSP,
You can take a look at Hengan Int. I have been following your blog for some time. Great work u are doing for sharing.
Curious to know, are u a U.K. citizen? Asking on the basis of withholding tax on your holdings.
Thanks Alfred!
Nope, not UK citizen, paying taxes in the country where I live. For my blog I don’t withdraw tax, I also don’t add/simulate brokerage fees. On the other side of the coin, I do not earn any interest on the cash I hold in my fictive portfolio.
Hi GSP
In that case do you have to pay withholding tax for dividends on Swedish, Korean and Denmark or even French (if you know) counters for non residents?
Yes I have to pay tax on dividends in countries where such taxes on dividends apply..
how are you valuing it?
So far no deep DD done that I can present here. Peer valuation, simple metrics like P/E, looking at margin, sell side research etc. I will try to present a full DCF later. This goes more into the Quality bucket, like for example ISS, rather than selling at a steep discount.
This seems a Fundsmith-type company: quality with resilience in difficult times.
ROCE (the preferred metric by Fundsmith) is ~15%, which is good but not great, and the Oper.Margin is 11-12% is rather mediocre :-s !
Unless they improve their numbers quite soon, I think there are better bets
Yep, the case is that there is room for margin improvement (comparing to Kimberly Clark).