Asaleo Care Ltd soars 5%: Is it dirt cheap?

Asaleo Care Ltd (ASX: AHY) has seen its shares soar by 4.9% in late afternoon trading, after the company reported a 12.4% jump in pro-forma profit for the six months to June 2014.

Shares were trading around $2.05 – well above the listing price of $1.65. Asaleo listed on the ASX back in June 2014 – at the time, the second-largest IPO on the ASX this year, behind Spotless Group Holdings Ltd (ASX: SPO).

At the time, we suggested the issue price was fair, although we were concerned about the company’s net debt levels. That debt has hardly changed, standing at $296 million at the end of June 2014.

If you didn’t already know, Asaleo is a manufacturer, distributor and marketer of personal care and hygiene products under brands like Sorbent, Purex, Libra and Handee. The company has embarked on a major capital investment program in the company’s Consumer Tissue division to reduce the costs of production.

Tissue generates two thirds of Asaleo’s revenues, so it’s important for the company to sort this division out. With 69% of its products sold to retailers like Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES), cutting production costs is likely to be an ongoing task.

The company says it is on track to meet its prospectus 2014 calendar year forecasts which suggests shares are trading on a prospective P/E ratio of 17.3x. But Asaleo will need to generate more growth in the second half that the first to reach its target of net profit of $70.6 million.

Asaleo didn’t declare a dividend, but says it intends to pay a dividend of around 4.8 cents per share when it reports in February 2015.

So, Asaleo is not cheap, faces some headwinds and doesn’t pay a dividend yet. I’d be passing on the stock for now, with plenty of more opportunities out there.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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