Reckitt's rejuvenated bull case

Little wonder, perhaps, that Reckitt’s shares contracted by more than a fifth between June 2017, when the MJN transaction completed, and the last days of 2019. However, that’s not where the story ends. 2020 has heralded a new era for the group, with positive change afoot. The market appears to concur. Since 1 January, Reckitt’s shares are largely unmoved. Quite an achievement when compared with the fall of more than 20 per cent endured by the FTSE All-Share index.

Under new chief executive Laxman Narasimhan, Reckitt has finally written off $5bn in goodwill tied to the MJN acquisition. This has allowed it to embark on a promising turnaround plan, building from a solid foundation of leading, high-quality brands, such as Nurofen, Cillit Bang and Durex, that people use every day around the world.

As part of this programme, in the medium term, Mr Narasimhan seeks mid-single-digit revenue growth. But while that goal is encouraging, it seems fair to assume that Reckitt will also see a boost because of the Covid-19 outbreak. As more of us are paying attention to handwashing and general decontamination, Dettol and Lysol – two major cleaning names, which sit within Reckitt’s portfolio – have been flying off the shelves. And such products could see a sustained boost beyond the current crisis, as the world adjusts to a new, more hygiene-conscious normal.

While results for 2019 fell short of Reckitt’s expectations, they also outlined the group’s strengths, and the opportunities for management to “rejuvenate the business”. Overall, net revenues edged up by 0.8 per cent on a like-for-like (LFL) basis to £12.8bn. On a statutory basis, the impairment charge tied to MJN pushed Reckitt to an operating loss of £2bn, from a profit of £3bn in 2018.

MJN’s issues directly affected Reckitt’s largest ‘health’ business, which houses Gaviscon and Durex on top of Dettol and MJN’s ‘Enfamil’ line. Here, net revenues slipped by 0.1 per cent to £7.8bn. That said, management is taking steps to sharpen health’s remit – repositioning it for a stronger future. It is splitting ‘nutrition’ out into a third, unique reporting category.

The benefits of a narrower focus were borne out by the performance of Reckitt’s smaller hygiene division. Here, LFL net revenues edged up by 3.6 per cent to £5bn, and adjusted operating profits rose by a quarter to £1.3bn. The division achieved solid growth through both volume and price, which was helped by the fact that it operates across structurally attractive markets.

Reckitt’s turnaround will not come cheap. It plans to spend more than £2bn over the next three years, two-thirds of which will be funded by better productivity, and the remaining third by taking investment as a charge to the income statement.

The knock-on effect of such expenditure is that 2020’s adjusted operating margins are expected to land around 3.5 percentage points lower than the 26.2 per cent achieved in 2019. But this year is described as “transitional” and as a “year of maximum investment”. Short-term pain should, theoretically, lead to gain – and a more robust structure – in the long run.

It helps that the group maintained a free cash flow conversion rate of 87 per cent as at31 December, in line with 2018. It also maintained its dividend policy, although this could change given the turbulent backdrop.