Essity Earnings: Pricing Actions Running Out of Steam and Weak Volumes for Parts of the Business

No-moat Essity reported disappointing fourth-quarter 2023 results, with negative 0.7% organic sales growth and a sequential EBITA margin deterioration to 13.3% from 13.9% in the third quarter. These results indicate to us that pricing actions are running out of steam, only delivering 0.7% to top-line growth after two years of significant contributions, while volumes were slow to recover (negative 1.4% in the quarter). We believe Essity has done a good job passing through the significant cost inflation it experienced through pricing and recovering profitability levels toward a preinflation norm, but its lack of brand power in a large part of the portfolio is making it more difficult to maintain volumes at these higher prices. Shares were down around 3% intraday, likely reflecting concerns about the slowdown in growth. Despite these short-term concerns, we are increasing our fair value estimate by 7% to SEK 300 after reflecting in our model that the recently announced sale of Essity’s 51.59% share in Hong Kong-listed Vinda that Essity fully consolidated in its results is now reflected as discontinued operations. We believe the sale is the right decision for Essity, given that it will reduce its exposure to a commoditized, low-margin business and allow management to focus on higher-margin and faster-growing segments such as incontinence and feminine care. With this, we expect longer-term growth to accelerate and Essity to have a higher likelihood of securing a competitive edge over time. Still, we don’t expect to upgrade Essity’s moat rating in light of this transaction, especially given the finalization of the strategic review of its consumer tissue private label Europe business, which has resulted in Essity maintaining ownership of the most commoditized and volatile part of its portfolio. With this, the entire consumer tissue business remains a considerable share of the portfolio (down to 33%, from 41%, of net sales after the Vinda deconsolidation).