Energizer Holdings Inc.

Company Overview: Energizer Holdings Inc. (NYSE: ENR) manufactures the key brands in batteries with renowned names, Energizer® and Eveready® that are sold worldwide. It also provides autocare and lighting products. ENR operates as a globally diversified manufacturer, distributor, and marketer of household products. The company segments its revenue streams geographically into Americans (~72% of FY20 revenue) and International (~28% of FY20 revenue). ENR’s product mix includes batteries, auto care and lights, licensing, and others.

ENR Details:

Price Hike Announcement in Global Battery Portfolio: To combat the rising cost of commodities, freight and labour, ENR increased product prices across their product mix. ENR will execute this hike through list price changes in FY20. ENR expects price hikes, in combination with improved operational efforts, to neutralize any material impact of cost inflation.

Global Partnership with Red Bull Racing Honda: On 16 April 2021, Armor All®, a leading brand of auto care products under ENR, announced a multi-year partnership with Red Bull Racing Honda as the auto cleaning & care partner. Armor All® aims to leverage the collaboration by exploiting international marketing strategies and build brand awareness.

Historical Financial Trend:

ENR clocked healthy revenues over the past five years aided by prompt marketing strategies, widened distribution reach, and replenished demand. Furthermore, long-term debt increased for acquisition buyouts and to maintain a sustainable liquidity flow.

Figure 1. 5-Year Key Financial Summary:

Source: Company Reports

A Glance on Quarterly Performance:

During the quarter, net sales inclined to $685.1 million, up by 16.7% due to replenished and growing demand. The top-line growth was primarily attributed to $74.7 million in organic growth and $10.7 million in acquisitions. On the contrary, gross margins declined from 41.6% to 40.5% due to increased operating costs due to higher tariffs and freight costs associated with transportation, higher sourcing volumes, and input costs. Despite cost inflations, Adjusted EBITDA enhanced from $123.2 million in Q2FY20 to $147.6 million in Q2FY21, primarily driven by $9.5 million expansion in organic demand, $19.6 million realized synergies, and $8.4 million favourable FX changes.

On a Balance Sheet front (as of 31 March 2021), ENR exhibits robust funding and liquidity position with cash and cash equivalents amounting to ~$261.0 million with a sustainable debt level. Its long-term debt marginally increased from ~$3,306.9 million as of 30 September 2020 to ~$3,352.2 million as of 31 March 2021, translating to net debt to credit defined EBITDA stood at 4.8x.

Full-year FY20 Performance

Despite COVID-19 discrepancies, ENR registered higher top-line growth, with net sales up by 10% at $2,744.8 million. Organic net sales improved by 2.5% due to demand spurt in COVID-19 and 2.7% distribution gains, partially offset by unfavourable weather conditions and lower replenishment. In addition, the acquired business’ contribution to net sales stood at $211 million. Adjusted Gross Margins confronted a marginal decline of 200 bps and stood at 40.6%, primarily attributed to $29 million COVID-19 related costs, an aggregate shift in customer and product mix, and a lower margin profile of acquisitions partly offset by $33.1 million incremental synergies. Adjusted free cash flow from continued operations stood firm at $405.1 million, primarily driven by improvements in working capital flow.

Figure 2. Q4 FY20 and FY20 Financial Summary:

Source: Company Reports

Top 10 Shareholders: The top 10 shareholders together form ~57.47% of the total shareholding. The Vanguard Group, Inc. and Fidelity Management & Research Company LLC hold a maximum stake in the company at ~9.31% and ~8.32%, respectively.

Figure 3: Top 10 Shareholders

Key Metrics: Acquisitive strategies, diversified product portfolio, and enhanced distribution reach resulted in healthy revenue growth over the past five years. Due to moderate working capital requirements, the current ratio although deteriorating but appears satisfactory. The company had stretched inventory days, partly funded by payables.

Figure 4. Key Financial Metrics

Growth and Profitability Profile (Source: Analysis by Kalkine Group)

Outlook: For FY21, ENR estimates a top-line growth of between 5% and 7%, considering distribution gains, aggravated battery demand, and favourable FX impacts. Adjusted FCF is estimated to stay close to the lower end of the $325-350 million range due to strategic inventory build-up that sustains increased demand. Adjusted EBITDA and Synergies are estimated to range from $620-640 million and $50-55 million. Moreover, EPS is calculated to bind between $3.30 and $3.50. The capital spending range for normal operations and acquisition & integration is estimated to be $40-45 million and $40-50 million – specifically for data and analytics initiatives.

Key Risks: Increased discrepancies in supply chain risks and disequilibrium in global demand & supply may result in further cost inflation and volatility in commodity markets. With technological changes and adaptive consumer behaviour, ENR may counter obsolescence risk. Moreover, COVID-19 costs may further increase with uncertainties ahead.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: ENR has delivered 3-month and 6-month returns of ~+0.455% and ~+2.77%, respectively. The stock is trading below the average of the 52-week high price of $53.19 and the 52-week low price of $38.59, indicating an accumulation opportunity. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a discount compared to its peer average EV/Sales (NTM trading multiple), considering possibilities of cost inflation, high COVID-19 costs, and lower cash flows from extensive capital expenditure. For this purpose, we have taken peers such as Kimberly-Clark Corp (NYSE: KMB), Reynolds Consumer Products Inc (NASDAQ: REYN), Central Garden & Pet Co (NASDAQ: CENT), to name a few. Considering prompt pricing strategies, consistent revenue growth, dominant liquidity position, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the current market price of US $44.15, down by ~2.32% on 7 June 2021.

ENR Daily Technical Chart

(Source: REFINITIV)

Note: The upper 2 yellow color lines denotes Resistance 1 and Resistance 2, while the lower 2 yellow color lines denote support 1 and support 2. 

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Disclaimer

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