Another broker report - off the web - note the reference to solid free cash flow
Analyst Note 07/21/2016
The perils of paying up for Asaleo Care's defensive earnings were laid bare by the abrupt downgrade to full-year guidance. The 15 times-plus forward P/E has corrected sharply, with the stock plummeting past our previous intrinsic assessment which was already 20% below the share price prior to today's profit warning.
The expected 15% fall in 2016 underlying net profit after tax, or NPAT, reflects the increasing competitive tension (first-half underlying NPAT flagged to be down 17% year on year) and higher pulp costs (due to weaker Australian dollar). Critically, it again highlights the company's relatively weak bargaining position against its customers--the very reason for our no-moat rating.
Asaleo Care's market-leading brands appear to be flexing very little pricing power in the face of aggressive price discounting in the market. This is hardly surprising as a third of the group's revenue base is generated from Woolworths and Coles, with a further third from other big retailers such as Aldi. Indeed, management is lifting trade marketing expenditures to maintain market share in the current environment, while also moving to an "Every Day Pricing" strategy for Feminine and Incontinent Care products with major retailer customers.
We have reduced our EPS estimates for 2016 to 2018 by between 9% and 14%, to incorporate the above factors. Dividend forecasts have been lowered accordingly. Our fair value estimate has been cut to AUD 1.60 per share from AUD 1.70.
Given the savage reaction to the profit warning, shares in Asaleo Care are now trading at a 5% discount to our revised fair value estimate. Negative investor sentiment is likely to linger for some time. However, the company's products are fundamentally "staple" in nature allowing the company to generate solid free cash flow. Furthermore, the strength of the balance sheet (net debt/EBITDA of 1.8 times) is such that the company is currently conducting a AUD 100 million share buyback (more than 70% complete).
DYOR
AHY Price at posting:
$1.33 Sentiment: Hold Disclosure: Held
