Stock Pick Series #2 – Essity

Introduction

In this blog post, we will continue our series "CBS SFC Global Select ESG Fund: Stock Picks." The next company we looked at is Essity, a hygiene and healthcare company based in Sweden. In this article, we will describe why the company was selected for inclusion in the CBS SFC Global Select ESG Fund.

Company Description

Essity is a global-oriented hygiene and health company. Its primary focal areas are on one-use products, such as tissue paper, diapers, feminine care, incontinence, compression therapy, orthopedics, and wound care. The company markets its personal care products primarily under the TENA, JOBST, Leukoplast, Libero, Libresse, Nosotras, and Saba, as well as other retailer’s brands; consumer tissue products under the Edet, Lotus, Regio, Tempo, Vinda, and Zewa, and retailer brands; and professional hygiene products under the TORK brand. Essity was founded in 1849 and is headquartered in Stockholm, Sweden.

Investment Thesis (Business)

Essity reflects very attractive defensive qualities, strong management execution, and a low valuation. Even if Essity has been negatively affected by Covid-19 and despite its effects likely lingering into 2021, we at CBS SFC are convinced that the negative effects are mostly temporary and that there is a clear positive long-term impact from increased hygiene awareness.

The Essity stock has performed surprisingly poorly in recent months, hampered by a temporary slowdown due to Covid-19, exaggerated concerns over rising pulp prices, and a shift from defensive stocks. At a P/E(21e) of 16x, the valuation is far from demanding. It is well below the 18–19x from the time following the company's spin-off, and its historical premium of 15– 20% relative to the OMX has reversed to a 20% discount.

The portfolio management of CBS SFC is confident that Essity will continue to earn a very healthy 12%+ EBIT-Margin and that (organic) top-line growth will come back, once the covid effects disappear. Furthermore, as a world market leader within incontinence products with the TENA and in professional hygiene with the Tork brand the selective presence growth strategy might play out very well. Also, there might arise interesting M&A opportunities in an overall very mature and stable industry, especially in medical solutions, which is one of the company's growth areas. Still, the market penetration for incontinence products in mature markets is relatively low, compared to baby care and feminine care and hence Essity might benefit from an increasing awareness as well as an aging population in Essity’s main markets.

Please find below a description of the market positions of the individual brands:

Dots = # in the market

Digging more detailed into the individual segments, we find that Europe is still very much the focus area of the company. Also, Consumer Tissues (including the famous brands Lotus, Tempo, and Zewa) account for 37% of the sales. This shows not only the firm’s pricing power in this segments but also the huge opportunities in the remaining operating activities

Investment Thesis (ESG Management)

The company is very aware of the environmental impact of its products and Essity’s management actively engages in activities to decrease the footprint of the company's products. This cannot only be seen in the bunch of activities towards increasing the circularity and after-use of the products but is also proven by the excellent third-party ESG scores and ESG subscores.

Furthermore, the company had assigned “improving well-being and contributing to a sustainable and circular society” as its major goal, even before innovation and market position. Further, the company invests heavily in R&D to find alternative fibers from plant-based agricultural by-products. On a governance level, sustainability has long been integrated into all of Essity’s functions and at all levels of operations. Essity’s objective is to generate maximum economic value and at the same time, live up to social and environmental expectations. The purpose of this integrated model is to ensure the Group’s commitments to its stakeholder groups, including customers, consumers, employees, shareholders, suppliers, creditors, decision-makers, and representatives of the community.

Essity’s overall management approach to social value creation is intended both to assess how the company impacts and interacts with people through its operations and to develop strategies for establishing positive relationships with relevant stakeholders. Essity’s overall environmental management approach is to enhance the operations’ positive contribution to the environment while minimizing negative environmental impact.

Investment Thesis (SDG)

The sustainable commitment of Essity has just started and there are still many improvements doable. Regarding the United Nations SDGs, Essity particularly focuses on six of the SDGs, namely 3 (good health and well-being), 5 (gender equality), 6 (clean water and sanitation), 12 (responsible consumption and productions), and 13 (fighting climate change), which is at the core of its business. In addition to the SDG, Essity has established partnerships with Unicef, Science Based Targets, and the Ellen MacArthur Foundation, among others.

At CBS SFC we believe that Essays leading ESG-position within its industry gives evidence of a company that takes responsibility for its own business as well as for society as a whole. It gives evidence that Essity is well managed and well-positioned to capitalize on the global societal and climate challenges we face today and will face to an even greater extent in the coming decades.

Conclusion

The popularity of the company's brands and the associated moat will continue to protect the company in the future. Given the company's market-leading positions in 90 countries and its highly scaled productions, it is highly questionable whether anything at all could threaten the dominance of this giant. Based on the company's fundamentals and extremely low debt, Essity could also have great acquisition potential to increase its relatively low organic growth rates.

Furthermore, the company is not only committed toward reducing the environmental impact of its operations but also has shown some respectable results so far. Given the relatively low valuation - especially when looking at peers like Kimberly-Clark, P&G, or Unilever, which are also not committed to sustainable development - the portfolio team of CBS SFC is confident to recommend the stock for the fund.