In January it was heartening to hear that, even with a tough economic backdrop, SSL International was still on track to increase earnings per share “by 50% over the three years to March 2012”. However, the City seems to be getting way ahead of itself in terms of valuation. Furthermore, the rationale used to justify the firm’s premium rating is getting ever more tenuous. One analyst even said recently that, “as people opt to save the pennies and spend more time at home during the recession, so SSL’s Durex condoms get used more often”.
I agree that SSL International is a quality franchise – its condoms have captured 35% of the global branded market. And its Scholl footcare products (including shoe inserts, gels and ointments) are leaders in a niche field. However, although the City seems convinced that SSL International will be taken over (rumoured predators include L’Oréal and Reckitt Benckiser), I have my doubts.
Firstly, bid speculation is nothing new. For example, SSL International held merger talks with Reckitt Benckiser six years ago. The discussions dragged on for nine months and proved fruitless. The trouble is, for a bid to be successful, it would probably need to be pitched north of 900p per share. Even in a re-energised mergers-and-acquisitions market, that looks far-fetched. Moreover, any bid would probably require consent from Schering-Plough, which owns the rights to the Scholl brand in the Americas.
SSL International (LSE: SSL), rated OUTPERFORM by Credit Suisse
So what are the shares worth on a stand-alone basis? At the interim stage, like-for-like sales had risen a creditable 3.3%, driven by expansion in eastern Europe and Russia. And in China, where the one-child policy remains in place, branded condoms are priced at a premium and are attracting the affluent middle class. Fine, but the City is pricing in an unjustified takeover premium so shareholders risk disappointment.
Analysts have penciled in sales and EPS for the period ending March 2010 of £781m and 33.3p. This puts the shares on a stretched p/e multiple of 22.2, falling to 18.3 times in 2011. Meanwhile, they only offer a 1.3% dividend yield. Instead, I would price the shares at a maximum of 15 times 2009 earnings. This equates to a fair value of around 500p per share, or nearly 50% below the current price.
Recommendation: SELL at 738p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments