No-Moat Essity Sees Further Pain Ahead Despite a Beat of Fourth-Quarter Estimates; Shares Expensive

Supported by energy-related subsidies and stabilizing raw material input cost inflation, no-moat Essity managed to beat profit expectations in the fourth quarter, delivering an annual adjusted operating margin of 7.6%—50 basis points ahead of our 7.1% forecast. Management cautioned on further input cost inflation on the horizon. This is expected to be driven by the rolling of energy hedging contracts at higher prices (Essity hedges 70% of its annual energy costs at the beginning of the year) and indirect cost inflation, mainly on account of higher salaries. On the other hand, cost inflation is expected to come down for raw materials and distribution, which we believe will largely compensate for Essity’s higher energy and indirect costs during the year.