Living in Suva, the only city in a small country, in the ordinary course of my week I come into contact with several of the biggest sales outlets for companies like Coca-Cola Amatil Ltd (ASX: CCL) and Asaleo Care Ltd (ASX: AHY). Some of the things I've seen recently with Asaleo Care products, in particular, have piqued my concern.
Anecdotes, anecdotes, and more anecdotes
Following its half-year report, in which management forecast a hefty fall in profit due to higher pulp prices and price discounting, I've noticed bigger discounts on Asaleo products. In particular Viti-brand toilet paper (the market leader) has been discounted at a number of outlets, well below previous discount levels. Additionally, I've witnessed heavy discounts on other products like Orchid garbage bags.
For a company that depends heavily on its in-market execution (shelf placing, pricing, and so on) for success, these strategies have not filled me with confidence in the sustainability of Asaleo's margins.
Why do I care about this?
Asaleo reported that its Pacific segment actually performed better than it did in the prior period last year. My key concern is that after forecasting lower profits due to higher pulp prices and discounting, discounts actually got bigger on the Asaleo products I regularly come into contact with. Combined with several other issues, I think investors might be better off avoiding Asaleo:
- Potentially heavier discounting at a time when pulp prices are rising
- Pressure on shelf prices in core Australian segment, due to competition and possibly retailer pressure from Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES)
- High levels of debt, with $320 million in borrowings (net debt to equity, or 'gearing' ratio of ~78%)
- It's tough to differentiate Asaleo products from competitors, recognisable brands notwithstanding
- Net profit margins are thin (currently ~9%) and falling profits have already been forecast
Obviously the discounting issues reported above are purely anecdotal, but would-be shareholders can easily form their own opinion on Asaleo products at their local supermarkets. Heavy discounting in Australian or New Zealand supermarkets, particularly if due to pressure from supermarket operators Woolworths or Wesfarmers, would not bode well for the company.
Higher input costs combined with heavy discounting, already narrow profit margins, and a big pile of debt does not sound like the recipe for a good investment.
Even though it's apparently 'cheap' in terms of its Price to Earnings (P/E) ratio and 5% dividend, I'd encourage readers to think carefully before investing in Asaleo today.
