Avgol sees bright future for nonwoven textiles in China

By Yuval Maoz

A year and a half ago, Avgol, a humble Israeli company from the Barkan industrial zone, was poised to wrap up a deal worth hundreds of millions of dollars that would have made it a world giant in nonwoven textiles. But then along came the global economic crisis and ruined its plans. Yet two months ago, Avgol became the first of the Tel Aviv-listed pack to dare to brave the waters again, and raised money in a bond offering.

With a tenth of the sum it had planned to raise in 2007 to carry out its acquisition, Avgol is now planning a bright new future – in China.
The company is hardly one of the large-caps that makes headlines. Avgol did, however, make it back to the TA-100 in the latest index rebalance, after a year’s absence. It raised NIS 86 million in its bond offering despite being rated A, below the investment grade of the big companies raising money. Avgol then raised another NIS 10 million through a private placement.

Though its expansion ambitions had been foiled, Avgol is still one of the world’s leading makers of nonwoven textiles, used, for instance, to make diapers and other hygienic products including underwear pads for women, adult diapers and disposable medical products. Its biggest client is Procter & Gamble, which makes Pampers. With a 35% share of the global diaper market, P&G is responsible for 40% of Avgol’s revenues.

Avgol also provides nonwoven fabrics for use by industry, agriculture and construction firms – and for towelettes.

In 2006 Israel Petrochemical Enterprises acquired 20% of Avgol’s shares for $18 million. It later increased its stake to 26%. Petrochemicals came on board when Avgol was worth $90 million. Today it’s worth double that. The company manufacturers in four locations: the Barkan industrial zone, North Carolina, China (since 2004) and from last year, Russia. It wants to expand production in China, where it now intends to invest $12 million, increasing its stake in the Chinese venture to 75%.

Demand in China is greater than supply, Avgol’s managers say. They predict that demand for nonwoven textiles in China will grow by 13% a year until 2012, while supply is only expected to increase by 6% a year.

In late 2006 Avgol adopted a policy of distributing at least half its profits as dividends. In April 2007 it gave shareholders $8 million; a year later, it distributed $10 million. In March this year the board decided on another $7 million dividend.

Ahead of the company’s bond offering, S&P Maalot downgraded its outlook to negative because of the dividend policy, calling it “relatively aggressive.”

CEO Nir Peleg insists that the company’s dividend policy isn’t detrimental and that Avgol can continue distributing its profits to shareholders, who have come to expect it, he says. “Based on our analyses, the company can meet its debt repayments and dividend payments as well. Even during the crisis, the company continues to manufacture at the same capacity. It is expanding and generating cash.” Nor does Avgol expect to have collection difficulties with its No. 1 client, P&G, Peleg adds.

Buying its main raw material, polyprophylene, constitutes more than 50% of Avgol’s cost of sales. Avgol revises prices to its clients quarterly, but its suppliers revise their prices monthly. A rise in the cost of its raw materials exposes Avgol to margin erosion, but a decline works in its favor. Avgol doesn’t maintain stocks of products; it produces on demand. It does keep stocks of raw materials because of labor instability at Israel’s ports.

The company’s R&D focuses on reducing the input of raw material per square meter of product. It has reduced density from 25 grams per square meter to 12, saving money for the client and improving profits, Peleg says. This is also better for the environment, he adds. Avgol has a strategic relationship with a Czech company developing nanometric fibers, which they believe will impede the passage not only of liquids but bacteria as well, while maintaining the fabric’s lightness.

Yet the company is lighter on cash than it had thought it would be. Avgol had thought to raise NIS 425 million to buy British rival Fiberweb, but this didn’t work out because the global financial system collapsed. It was supposed to carry out its acquisition through a stock swap, and the cash was needed to repay Fiberweb’s debt. The deal was all but done, and if it had been carried out a year earlier it would have been finalized, says Peleg.

In the first quarter of 2009, Avgol’s sales fell 11% from a year earlier to $54.4 million , though gross margins improved. But Peleg believes that expanding production in China will take care of the company’s future growth, starting next year.

Source haaretz.com

Comments are closed.