Essity: Sweden-Based Kimberly-Clark Comp at Attractive Valuation

Jean-Pascal Rolandez of The L.T. Funds presented his investment thesis on Essity (Sweden: ESSITY-A, ESSITY-B) at European Investing Summit 2020.

Thesis summary:

Essity holds the number one or number two position within at least one product category in approximately 90 countries. Essity is the global market leader in incontinence products with the TENA brand and in professional hygiene with the Tork brand. The Swedish group also holds strong brands and market positions in the markets for baby care (Libero, Lotus, Drypers, Pequenin) feminine care (Bodyform, Nana), medical solutions (Leukoplast, JOBST) and consumer tissue (Lotus, Tempo, Zewa).

Over the last five years sales grew organically 3.4% p.a. and EBITDA per share 11% p.a. Jean-Pascal assumes a 4% sales decline in 2020 not preventing a 4% increase in EBITDA per share (thanks to lower raw material prices) as well as lower capex, allowing for a significant positive free cash flow. In 2009, sales were flat, showing the very defensive nature of Essity’s businesses. Again in 2020, against the pandemic background, Essity is showing resilience.

Jean-Pascal expects sales to grow 17% p.a. by 2024, after the 4% drop in 2020(e) sales. Essity boasts a strong cash generation, with 2019 ROCE (13.7%) significantly exceeding WACC (4.2%). Trading at 11x 2022(e) EBITDA and 1.8x sales, a 10% discount to Kimberly-Clark, its main peer, Jean-Pascal expects the share price to increase by 6% p.a by 2024, in line with EBITDA growth. AB Industrivarden holds 29.2%, Norges 6.8% and Ami Insurance 4.2%.

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About the instructor:

Jean-Pascal Rolandez is the manager of The L.T. Funds, a Geneva-based investment firm focused on a buy and hold strategy based on a limited number of European stocks with a 5+ year investment horizon. Jean-Pascal has more than 25 years of equity investment experience and has founded the first investment club at the leading French business school ESSEC. Prior to establishing The L.T. Funds, Jean-Pascal held various executive positions at BNP Paribas for 22 years, including as Paribas’ French equity strategist.

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