Reckitt Benckiser tops up margins

Household staples stalwart Reckitt Benckiser (RKT) gave markets a healthy surprise, upgrading revenues and margin expectations for 2022 after booking consensus-beating 11.9 per cent like-for-like sales growth in the second quarter to the end of June. Shares in the Slough-based maker of disinfectants and cough medicines rose by 5 per cent on the morning of results, but remained 14 per cent off Reckitt’s pandemic peak when demand for its hygiene and health products reached fever pitch. 

Like-for-like revenues are now expected to grow by between as much as 5 and 8 per cent in the full year, up from previous guidance of 1 to 4 per cent, while the Dettol maker also anticipates further advances in the adjusted operating margin towards a medium-term target in the mid-20s. This looks well on its way, with interim margins hitting 25.6 per cent, a 290 basis point increase, thanks to price hikes and a more profitable product mix, as well as one-off gain on the sale of surplus land in Asia.

The performance of its health products such as Lemsip, Nurofen and Strepsils was especially strong thanks to the Omicron variant striking in the midst of a cold and flu season. Over-the-counter net revenue grew over 60 per cent in the first half of the year, and more than half of its core products held or gained market share.

Its nutrition segment also gained ground, after a shortage of baby formula in the US helped expedite Reckitt’s Food and Drug Administration (FDA) approval to sell stateside. Nutrition net revenue grew 23.6 per cent to £1.2bn, but Reckitt expected sales and margins to normalise as supply disruptions reduce in the coming weeks.

Meanwhile, though demand for a third of Reckitt’s brands is considered ‘sensitive’ to Covid fluctuations, so far sales of hygiene products are still above pre-pandemic levels. Year-on-year declines have stayed at a manageable 6 per cent on a like-for-like basis, with price increases helping to offset lower volumes.

Overall sales growth beat consensus by more than five percentage points, and  Reckitt’s valuation has recovered from last year’s knocks: a £3.35bn loss on the sale of its lower-margin Chinese infant formula business, ICFN and another £234mn of losses from the disposals of Scholl and Enfabebe in Argentina. Its forward price/earnings ratio has returned to its five-year average of 19.3, which does not look overly demanding given the upgraded outlook. Buy.

Last IC View: Buy, 6,122p, 17 Feb 2022.