Asaleo Care Ltd (ASX: AHY) is one of the leading players in the Australia and New Zealand personal-care and hygiene sector. Its brands such as Tork, Purex, Handee, Libra, TENA and Treasures hold number-one or number-two positions in the majority of its product categories.
I have previously held Asaleo Care shares for a number of reasons. It generates strong defensive cash flows, it maintains a healthy balance sheet, it has a high dividend yield and its management are generally good at capital management. They have announced a share buy back in the past when faced with limited viable options to utilise earnings.
Despite all this, here are 3 reasons why I decided to sell my shares in Asaleo Care:
- Competitive trading environment. Asaleo Care has faced increasing competition from global players such as Kimberly Clark – particularly in baby & feminine products as well as cheaper store brands in tissue products. This reduces Asaleo Care's pricing ability and makes it difficult for them to pass onto customers increases in the price of pulp (tissue raw material) or costs relating to a weaker Australian dollar (pulp is priced in US dollars on global markets). To make matters worse, the majority of Asaleo Care products are sold in supermarkets such as Coles which is owned by Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) who have significant bargaining power and can lower prices or reduce shelf space.
- Limited growth opportunities. Asaleo is forecasting low-to-mid-single digit growth and realistically, can only significantly grow its market share if its products are cheaper. That in turn puts pressure on profitability and as such is not a viable option.
- Better options out there. Given the slower growth prospects, I had the option to hold Asaleo shares for its high dividend yield but even that does not necessarily make it a better long term option than companies such as ResMed Inc. (CHESS) (ASX: RMD), Magellan Global Trust (ASX: MGG) and Reece Ltd (ASX: REH) which are part of our top picks for November.
