Should you buy Asaleo Care Ltd?

Is this stock a bargain or overpriced?

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Asaleo Care Ltd (ASX: AHY) is a manufacturer, distributor, and marketer of personal care and hygiene products including paper towels, toilet paper, feminine health, soap and nappies with brands like Sorbent, Purex, Libra, Handee and Deeko.

The company listed on the ASX last Friday, with an issue price of $1.65, and is currently trading at the same price. It was the second-largest listing on the ASX this year, with a market cap of $995 million behind Spotless Group Holdings Ltd (ASX: SPO).

Prior to the IPO, Asaleo was jointly owned by Sweden’s SCA, Pacific Equity Partners (PEP) and management. SCA and management have retained smaller stakes post the IPO, with SCA’s share dropping from 50% to 32.7% and the shares are held in escrow until Asaleo’s results for 2014 are announced to the market.

Like Coca-Cola Amatil Ltd (ASX: CCL), Asaleo sells a large portion (69%) of its products to retailers like Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES). And also like CCA, Asaleo will feel constant pressure to cut the margins on its products, despite holding the number one or two brands in a number of its categories.

The remaining 31% of sales goes to major distributors, hospitals, aged care facilities and large companies – including fast food outlets, and distributors such as Staples and OfficeMax.

At the current price, Asaleo is trading on a prospective P/E ratio of around 14, with dividend yield (unfranked due to historical tax losses) of more than 5%. But a major negative is around $300 million of net debt. As such, that appears to be a reasonable price for Asaleo, and Foolish investors may want to wait for a more reasonable price that offers a margin of safety, and a big fall in the debt balance before jumping in.

Motley Fool writer/analyst Mike King owns shares in Coca-Cola Amatil and Woolworths. You can follow Mike on Twitter @TMFKinga

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