Despite delivering yet another period of forecast-beating earnings growth, Reckitt Benckiser's results were overshadowed by nagging doubts about continued weakness in its European markets - which accounts for 43 per cent of net revenue.
Chief executive Bart Becht pointed out that the European market was currently growing at less than 1 per cent, and that despite heavy promotional expenditure Reckitt had seen sales slip by a percentage point in the second quarter, mainly the consequence of weakness in its fabric care brands such as Vanish, which faced major competitive activity. Similarly, he said that there was no market growth in its North America/Australia division, but that Reckitt had been able to increase sales by taking market share in healthcare franchises such as Lysol.
However, Reckitt reported its highest ever growth rates in its developing markets, with a 19 per cent increase in sales, more than double the market growth rate. And because most of the sales improvement was driven by volume improvement rather than price increases, profitability moved sharply upwards thanks to the benefits of operational gearing.
Along with the benefits of lower raw material costs and a renegotiation of its media spending at more favourable rates, group operating margins (excluding pharmaceuticals) improved by 100 basis points to 20 per cent, underpinned by a particularly strong improvement in North America. There was still no word, though, on the coming impact of generic competition in the US for its heroin substitute Suboxone, which helped drive revenues in its pharmaceutical business 24 per cent higher to £310m and operating profits up by 48 per cent to £215m. The group said it was looking at ways to offset the loss of as much as 80 per cent of pharmaceutical revenues and profits.
The proposed £2.5bn takeover of Durex-maker SSL could offset some of the hit. Mr Becht reiterated the strategic rationale for the proposed deal, which he said would bring a step change in personal healthcare and critical mass in East Asia, including China. Both, he said, are high-growth, high-margin segments of the group, and that costs synergies of £100m a year could be achieved by the end of 2012.
Broker Shore Capital expects underlying full-year pre-tax profits of £2.06bn and EPS of 212p (2009: £1.89bn/199p).
RECKITT BENCKISER (RB.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 3,306p | MARKET VALUE: | £24bn | |
| TOUCH: | 3,305-3,306p | 12-MONTH HIGH: | 3,667p | LOW: 2,686p |
| DIVIDEND YIELD: | 3.2% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 619p* | NET DEBT: | £577m | |
| Half-year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 3.78 | 816 | 86 | 43.0 |
| 2010 | 4.06 | 971 | 101 | 50.0 |
| % change | +7 | +19 | +17 | +16 |
Ex-div:2 Aug Payment:30 Sep *Includes intangible assets of £6.2bn, or 861p a share | ||||
