The consumer goods manufacturer may be in fine fettle, but its share price has been inflated by talk of a bid that is unlikely to materialise.
Turkey of the week: SSL International (SSL), rated as OUTPERFORM by Credit Suisse
SSL International makes Durex condoms – in which it has roughly a 30% share of the global branded market – and Scholl footcare products, ranging from shoes and inserts to gels and ointments to treat dry heels and warts. Last year’s £480m turnover was split 80% Europe, 15% AsiaPacific and 5% Americas. The City seems convinced that SSL International will be taken over, but I have my doubts. The latest gossip surrounds Blackrock, a US fund manager. It has amassed a 15% stake in SSL International, which has sent the shares to the moon. So why am I sceptical?
Firstly, speculation of a bid is nothing new. SSL International is often being touted as prey to a larger consumer goods organisation – such as L’Oréal or Johnson & Johnson. In fact, SSL International held merger talks with Reckitt Benckiser four years ago. Although the talks dragged on for nine months, they proved fruitless. Admittedly a tie-up between the two firms would be synergistic, but at these prices I believe any acquirer would struggle to make the numbers work. So what are the shares worth on a standalone basis?
In a trading update last week, the board reported that it is on course to deliver double-digit operating profits growth this year, thanks to the success of its new Durex Play range – which includes sex toys and lubricants – and new footcare products, such as Scholl Cracked Heel Repair Cream. Analysts have pencilled in sales and EPS for 2007 of £517m and 18.5p respectively, putting the shares on hefty p/e ratios of over 28 for this year, falling to 23 times next. Moreover, the current year price-to-earnings growth ratio (defined on page 52) multiple is 3.5 – which looks far too rich.
Undeniably, the firm is in fine fettle with like-for-like sales in the first half growing at an impressive 9% a year, driven by expansion overseas. In China especially, where the one-child policy remains in place, branded condoms are priced at a premium and are attracting the affluent new middle class. Revenues from the Durex Play range have risen from zero to £27m in the past two years. Yet the shares already incorporate a significant bid premium in the price. I would value the stock on a maximum 20 times 2007 earnings multiple – giving a fair value of around 370p per share, or 40% below current levels. I think the chances of a bid being launched at these lofty levels is remote, as it would probably have to be pitched north of 650p. That leaves the stock looking vulnerable.
There is even talk that SSL International may turn predator rather than prey, thus opening itself up to potentially costly acquisitions, and perhaps even making itself a less attractive morsel to interested parties. Interim results are due out on Tuesday 20 November.
Recommendation: TAKE PROFITS at 507p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments