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Here’s why Asaleo Care Ltd shares are being annihilated today

The share price of Asaleo Care Ltd (ASX: AHY) has plunged by over 31% in morning trade after the company behind personal care and hygiene brands including Sorbent, Libra and Handee announced incredibly disappointing preliminary half year results and downgraded its full year guidance.

Key highlights include:

  • Revenue dropped 4.3% year on year to $292.7 million.
  • Underlying earnings before interest, tax, depreciation and amortisation of $58.6 million. A 10.1% drop from HY 2015.
  • Underlying net profit after tax fell 16.6% to $27.1 million.
  • Statutory net profit after tax of $24.9 million, which is a drop of 23.4% from HY 2015.
  • Tissue segment revenue fell 1% to $205 million, whilst Personal Care segment revenue fell 11.3% to $87.4 million.

Management has explained that the lower sales revenue was a result of increased discounting by competitors. As well as this, increased trade spend required to support market share, higher pulp costs, and one-off costs related to the activation of the Every Day Pricing strategy with major retailers also negatively impacted results.

These results were clearly not going to go down well with the market when it opened. But perhaps it is the full year guidance which really sent shareholders heading for the exits in their droves.

Previously management had provided reasonably positive full year earnings guidance. Although it expected EBITDA and underlying NPAT to remain steady, it had forecast earnings per share to grow in the low to mid-single digits.

In its updated guidance it now expects full year EBITDA to decline by 10%, underlying NPAT to drop 15%, and earnings per share to be 9% lower year on year.

Asaleo Care’s CEO Peter Diplaris had this to say on the results:

“Whilst it is disappointing to announce reduced results and outlook for the full year, we continue to believe that the strategy and initiatives which we have implemented and planned will put the Company in a strong position going forward. […] as a result of the competitive market environment in the Consumer Tissue category, we will continue to drive initiatives to mitigate cost inputs this year, and we expect pulp costs will likely decline in 2017 due to the current and market forecast outlook for US$ pulp prices. We are also confident that new product development initiatives scheduled for 2017 will enhance our value proposition to consumers.”

Clearly this has been a difficult period for the company and it comes as no surprise to see investors head for the exits. Despite the drop in its share price today I believe it may be too soon to consider an investment.

Whilst things may ease a little if pulp prices do come down, I still expect the industry will remain just as competitive. Without any real competitive advantage, I believe Asaleo could continue to struggle for some time.

Rather than buying the dip I would suggest investors look at other shares on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) which have a competitive advantage such as Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL).

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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