Investors looking for the ultimate in defensive stocks are often attracted to Ansell Limited (ASX: ANN), which is a manufacturer of things like gloves, protective outfits and condoms. Many of its items are single-use only and in constant demand, which provides a degree of earnings certainty to Ansell.
Demand for these items is also far less likely to be affected by a recession or economic downturn. An alternative way to invest in a company offering single-use items with constant demand is Asaleo Care Ltd (ASX: AHY), which manufactures toilet paper, tissues, and hygiene products.
A relatively recent listing, Asaleo has been around for about 18 months and has operations in Australia, New Zealand, and Fiji. It's the manufacturer behind a number of well-known brands including Tork, Sorbent, Orchid, Libra, and TENA.
Earnings overview
Earnings are split almost equally between Personal Care items (49.6%) such as nappies, tampons, and incontinence pads, and Tissue products (50.4%) such as toilet paper, facial tissues, paper towels, and serviettes.
Asaleo's products are in almost every major retailer, including Aldi, Costco, Coles, Woolworths, and Staples. Retail customers account for 68% of sales, while Business-to-Business (B2B) sales to distributors, hospitals, aged care facilities, etc, comprised the remaining 32%.
With large-scale manufacturing of these types of items, Asaleo is at risk of changes in the cost of materials. Management identifies the price of pulp, finished goods, sea and road freight, packaging, engineering, business services, and utilities as key input risks. However, Asaleo is diversified enough (5 manufacturing centres, 6 distribution centres) that no one supplier makes up more than 10% of the company's total cost base.
Growth opportunities
Unfortunately, such heavy retail exposure has resulted in pricing pressure that led to a slight decline in revenues over the past year, even though profits rose. Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) are well-known for pressuring suppliers to keep prices low, and the deep discounting model of Costco and Aldi likely reduces the opportunity for Asaleo to achieve price increases.
I haven't done any research into the area, but it seems highly likely that each person has a relatively fixed demand for toilet paper, tissues, and sanitary products in the year. Growth in these products will be in line with population growth or inflation only, which is to say quite slow.
There is some opportunity for growth with an expansion in Papua New Guinea (population 7 million), as well as innovations in new products. Asaleo has identified embarrassment as one of the key barriers preventing people from buying incontinence items, and believes its web shop for these items could also deliver some growth.
Foolish takeaway
There are other considerations such as company debt (high, but cheap) and cash flows (good) as well as competition and manufacturing costs that had to be omitted for length reasons. As it stands, Asaleo appears fairly priced given its growth prospects, and defensive nature. However, investors should be cautious about pressures on its margins from retailers, as well as the company's elevated debt – which is still at the bottom of the board's preferred range. Given its industry and likely growth trajectory, I would be aiming to pick the company up at a discount to today's prices.
