Essity Earnings: Profit Delivery Ahead of Expectations and Encouraging Portfolio Initiatives

No-moat Essity delivered strong first-quarter results, with organic sales growth of 16% (25% reported, with an 8% currency benefit) and a 200-basis-point improvement in adjusted operating profit margin to 9.5% in the quarter. Operating margin recovery is tracking ahead of our expectations after the significant drop experienced last year, with pricing actions catching up with raw material, energy, and distribution cost inflation in the quarter. As this is expected to sequentially improve in the coming quarters, especially for the consumer goods segment, we increase our 2023 EBIT margin forecast to 10% from 8.5% previously. Our long-term margin forecast remains unchanged, calling for a steady-state operating margin of around 13% for the group. The improved short-term margin outlook, together with our expectation for heftier 2023 net sales (167 billion SEK compared with 160 billion SEK previously, driven by the first quarter results and more resilient volume development expected for the full year) lead us to increase our fair value estimate by 10% to SEK 260. Still, we view shares as expensive at current levels, trading in the 2-star territory.