Reckitt Benckiser beats expectations

Reckitt Benckiser (RKT) defied the gloomsters who were concerned about a sales tail-off. The Slough-based purveyor of Dettol disinfectant and Clearasil acne creams, which enjoyed robust growth across key brands at the height of the pandemic, posted like-for-like (LFL) revenue growth ahead of expectations for 2021 and maintained the full-year dividend.  

LFL sales, on a constant-currency basis, were up by 3.5 per cent. Sales of hygiene products, which make up almost half of the group’s total net revenue, were up 7.5 per cent to £5.9bn as volumes and the price mix improved. Tellingly, net revenue from ecommerce – excluding its now-sold China business – grew by 17 per cent.

Demand for around a third of Reckitt’s portfolio has fluctuated due to Covid-19 trends. This volatility is focused on its disinfectant and cold and flu products, such as Strepsils and Lemsip, which were snatched off the shelves during lockdowns. Matt Britzman, equity analyst at Hargreaves Lansdown, said: “As we emerge on the other side [of the pandemic], where disinfectant products rebase is being carefully watched.”  

Lysol net revenue grew by high single digits in the year, after a 70 per cent increase in 2020. Dettol sales fell by “low double digits”, but are still up by over 40 per cent against 2019.

Disposals made in the year should benefit Reckitt over the longer term. The immediate impact was painful, with a £3.5bn intangibles loss on disposal recognised on the income statement, which dragged the group down to a statutory loss for the year. But the sale of lower-margin businesses such as Infant Formula and Child Nutrition China (IFCN), which contributed a £67mn operating loss in the year, improves prospects for the years ahead. The group’s operating margin was 120 basis points higher without IFCN. 

While Reckitt is having to deal with cost inflation – excluding IFCN, the margin still shrank by 160 basis points to 21.7 per cent despite the impact of better pricing, sales mix and productivity improvements – the outlook now looks better. Over the medium term, an operating margin in the mid-20s looks achievable.  

The shares are trading at a consensus 19 times forward earnings, below the five-year average. This looks undemanding given a better-than-expected revenue performance and positive signs on the demand front. Buy.

The shares are trading at a consensus 19 times forward earnings, below the five-year average. This looks undemanding given a better-than-expected revenue performance and positive signs on the demand front. This keep us keen. Buy.

Last IC view: Buy, 5,706p, 27 Jul 2021