HELKF - Henkel May See Issues Outside Of Adhesives

Summary

• Even more well positioned consumer brands companies are seeing too large volume hits as pricing action means share won by supermarket-branded products.
• Henkel's adhesives may do alright because these products are harder to commodify, especially those with industrial markets since industrial macro figures still look good.
• Its other businesses are likely going to be unimpressive, especially the home and laundry business.
• Guidance ranges are large. The preference shares aren't a good option considering macro and sustained share wins of supermarket brands is an issue for the ordinary too, even if beaten down.
• 21x forward PE is not interesting. Pass.

Henkel ( HENKY )( HELKF ) is a consumer products company with a substantial focus on Europe. It has a pretty good portfolio of adhesives, and while there's a pressure on housing, DIY should be more resilient, and the industrial markets should be decent given recent German data but also global industrial production data. The other product lines, especially laundry and home, are a bad choice in the current environment. The best of the consumer products companies are losing share to supermarket-branded products and home and laundry is by far the most exposed to that sort of competition. The share loss will be sustained and partially permanent, and pricing action is becoming an untenable option because of potential volume hits. The stock trades like consumer products stocks do, which is expensive and not very compelling. Pass.

Note on Henkel

Be aware than Henkel has preferred shares and ordinary shares. The capitalisation of the preferred shares is usually somewhat in line with that of ordinary shares (usually a little less since there's less outstanding shares), although it's been hit relatively more due to preferred shares being poorly positioned in the current rate-hiking environment. The reason this matters is because you should not trust the screener figures for EV, as they may account improperly for the preferred shares, which must be included as a type of financial obligation for the equity bridge.

The tickers in this article concern the ordinary share of Henkel, and we can say right away that with the macro situation being what it is, the measly sub-3% dividend on the preferreds should not compel you to buy.

Q3 Note

Henkel has three segments : adhesive technologies, beauty products and home and laundry. Adhesive technologies includes various binding agents that have uses both in DIY applications, which tend to be a pretty resilient market, but also in industrial applications. Two weeks ago we got the German data on industrial production and it looked good, there was growth and a positive surprise. Europe broadly looked worse, but in general industrial volumes aren't in decline. In general, the situation is pretty good for adhesive technologies, and they should be viewed as a less commodified segment for the company with less competitive threats. There might be pressure on the sales as economic pressures continue to mount on households, especially with stubborn inflation in key geographies in Europe but also from the shortage in semiconductors quickly becoming a glut with lower rates of fab ordering and investment, but also concerns around the car market which may see a sputtering of its pent-up demand from the pandemic. So while the direction isn't good we acknowledge that it's solid.

In the Q3 pricing action drove things, but volumes at least managed to stay flat.

Beauty products are marginal and not worth much discussion as they account for about 3-6% of EBIT depending on which year you look at, as there was a major profitability hit in the challenged 2022. They have not proven resilient.

The problem is the home and laundry business, which is very exposed to supermarket brand competition. They have the most commodified products you could possibly buy in a supermarket, and it shows in their volumes which have suffered as they run ahead in price compared to the supermarket brands.

Even more quality consumer products companies like Nestle ( NSRGY ) are ' reaching the limits' of how much they can flex pricing power with brand, and home and laundry are worse positioned than most of Nestle's products. This segment is almost 30% of EBIT, and it matters.

Bottom Line

Guidance is also not great from the last Q3, showing very wide ranges. Forward PE on the ordinary shares are around 21x, which is too low of an implied earnings yield of 5% in the current market when growth prospects are clearly limited. Guidance for EPS was for substantial double-digit declines between 25% and 15%. We think the wins by supermarket brands in share will be very durable in laundry and home, and while FX made the last quarter look good, pricing is coming at a great cost in volume and this tradeoff will only get worse.

Investors should also note that in all the segments FX, because of sales in the US which is not an irrelevant market for Henkel at a 23% proportion, was a major contributor to growth, more than 33% of the growth. While the dollar should remain strong on rate expectations, don't expect a repeat performance in 2023.

Overall, the direction isn't great and the pressures are mounting and at least partially irreversible, especially for the home and laundry segment. This is not a company we'd consider as reference rates come even farther up with continued upward shifts in the yield curve.

For further details see: