Company Reports

No-moat Essity posted first-quarter 2024 results that were largely in line with our expectations for the full year and we’re leaving our fair value estimate unchanged at SEK 300. The company delivered an EBITA margin of 14% in the first quarter of 2024, up 220 basis points year over year and up 70 basis points compared with the fourth quarter of 2023. This was mainly attributed to lower costs for raw materials and energy, offset somewhat by lower pricing and increased advertising and promotional spending. Pricing turned negative in the first quarter, down 3%, primarily as a result of lower prices in the commoditized consumer tissue business. Still, according to management, this is the result of some carryover price declines from last year, which should be phased out in coming quarters. Further, pulp prices have been trending higher lately, which might result in further price increases for the consumer tissue business in the second half of the year.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal-care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

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).

No-moat Essity delivered solid third-quarter results, including a substantial sequential improvement in EBITA margin to 12.2% from 10.7%. This is the fourth consecutive quarter of margin improvement, with Essity well on track to reach pre-inflation margin levels and even surpass them as it leaves behind the peaks in input cost inflation and continues to engage in methodical portfolio management. Organic sales growth in the quarter tracked our forecast, but net sales continued to benefit from a significant currency tailwind as a result of the weak Swedish krona. Incorporating the third-quarter results into our model and increasing our 2023 adjusted operating margin forecast to 11.2% from 10.6% leads us to increase our fair value estimate to SEK 280 per share from SEK 260.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal-care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

No-moat Essity’s second-quarter results disappointed investors, with the share price falling by around 10% in early trading. The adjusted EBIT of SEK 4.4 billion reported for the second quarter was below FactSet consensus of SEK 4.8 billion, hit by salary inflation and higher marketing costs in the consumer goods segment. Our full-year forecast was already lower than consensus; therefore, the update does not affect our fair value estimate of SEK 260. We view shares as fairly valued at this time.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal-care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

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.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal-care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

Supported by energy-related subsidies and stabilizing raw material input cost inflation, no-moat Essity managed to beat profit expectations in the fourth quarter, delivering an annual adjusted operating margin of 7.6%—50 basis points ahead of our 7.1% forecast. Management cautioned on further input cost inflation on the horizon. This is expected to be driven by the rolling of energy hedging contracts at higher prices (Essity hedges 70% of its annual energy costs at the beginning of the year) and indirect cost inflation, mainly on account of higher salaries. On the other hand, cost inflation is expected to come down for raw materials and distribution, which we believe will largely compensate for Essity’s higher energy and indirect costs during the year.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal-care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

Cost pressures weighed heavily on no-moat Essity’s third-quarter results, leading the adjusted EBITA margin to contract by 400 basis points compared with a year earlier to 7.5% despite hefty pricing actions (price and product mix contributed 14.8% to net sales in the quarter). Profit margin deterioration was primarily driven by extraordinary raw material, energy, and distribution cost inflation, which delivered a more than 1,200-basis-point hit to gross margin in the quarter. We commend Essity’s discipline in implementing price increases and are encouraged by the positive volume development, which contributed 1.5% net sales in the quarter despite the significant price increases deployed across the portfolio. Still, we are concerned that the lack of differentiation in Essity’s portfolio limits its bargaining power with customers and is likely to further delay profit margin recovery as costs continue to surge. For this reason, we reduce slightly our operating margin forecast by 50 basis points to 7.1% for the year and expect a more prolonged margin recovery toward pre-pandemic levels. However, the valuation impact of our downgraded forecasts is largely offset by the time value of money. Consequently, our fair value estimate of SEK 232 is unchanged.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal-care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

We initiate coverage of Essity with a SEK 232 fair value estimate, a no-moat rating, and Standard Capital Allocation Rating. Our Medium Uncertainty Rating reflects the firm’s susceptibility to raw material price volatility and the resulting fluctuations in profitability and operating cash flows. We believe shares are expensive at current levels, trading at an 11% premium to our fair value estimate.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal-care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

We are dropping coverage of Essity. We provide broad coverage of more than 1,500 companies across more than 90 industry groups and adjust our coverage as necessary based on client demand and investor interest.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

No-moat Essity's profitability remained hampered by higher pulp and oil-based raw material costs in the first quarter, with adjusted operating margin contracting 70 basis points to less than 10% (below our nearly 12% full-year estimate). Although we expect the near-term cost environment to remain challenging, we're encouraged by Essity management’s actions to defend its bottom line. For one, its efforts to extract costs from its operations helped its selling, general, and administrative expense ratio leverage 80 basis points during the quarter to 16.9%. Further, the firm's top-line trajectory remains solid, with organic sales up 4% versus our low-single-digit estimate for the year, including a 3% contribution from price/mix. We're not anticipating a material change to our SEK 222 fair value estimate as we adjust our near-term forecast, as a higher sales and lower profitability outlook should largely offset one another, and would suggest investors wait for a more favorable entry point.

We think Essity faces obstacles to amassing brand power in its portfolio. Competition from both branded and private-label offerings in the global personal care and hygiene category, plus low barriers to entry and a lack of switching costs, hampers Essity's ability to form the entrenched retail relationships needed to secure a competitive edge. We assign Essity a no-moat rating.

No-moat Essity ended its fiscal year on largely solid footing, as strengthened pricing drove solid sales growth in the fourth quarter (up 3.3%, with more than three fourths of these gains driven by price/mix), while ongoing raw material cost pressures weighed on adjusted EBITA margin, which contracted 150 basis points to 11.1%. On a full-year basis, 8.5% top-line growth outpaced our expectations by around 100 basis points, but adjusted EBITA margins of 10.9% (140 basis points below the prior-year period) fell 70 basis points short of our estimate. These effects largely offset one another, with full-year earnings per share amounting to SEK 11.23, comparable to our SEK 11.26 estimate. As a result, we’re not anticipating a significant revision to our SEK 222 fair value estimate, outside of adjustments for the time value of money, and are reiterating our longer-term outlook, which calls for slightly below 4% organic sales growth and low-teens adjusted EBITA margin on average over the next five years. With shares up by a high-single-digit percentage on the announcement, we’d suggest investors wait for a more attractive entry point.Raw material cost headwinds had the most pronounced effect on the consumer tissue segment (38% of sales), with the market price for pulp increasing around 20% in the fourth quarter. However, we were pleased to see the firm’s efforts to improve pricing by reducing sales of its lower-margin offerings (with price/mix up 5.1%, versus a 0.5% decline in volume) help stabilize margin erosion in this segment. As evidence, adjusted EBITA margin of 6.9% (falling 130 basis points) marked a sequential improvement from the 5.8% posted in the third quarter (which had represented a contraction of 440 basis points). Although we maintain that a lack of differentiation in the commodified tissue business will constrain pricing power over the long run, we think positive mix effects and cost-saving initiatives will help Essity restore its margins over time.