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Buy Reckitt on the dip

Ignore the noise, and buy into the consumer goods giant's long-term growth
July 27, 2017

Reckitt Benckiser (RB.) has become the latest consumer goods company to give itself a makeover. Last week it announced the sale of its food business to US company McCormick for $4.2bn (£3.2bn), which it plans to use to pay down some of its debt. By dropping the food business the company can focus on pursuing its goal of becoming a “global leader in consumer health and hygiene”. Analysts also suggest that the money raised could act as additional funding for Reckitt to make further acquisitions and increase its market share. Thereby, it could take advantage of the consolidation in the consumer health space, which is expected to continue.

IC TIP: Buy at 7,592p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Continuing strong demand for consumer health products
  • Sale of food business
  • Geographically diverse
  • Strong free cash flow
Bear points
  • Lingering effects of cyber attacks
  • Short-term pressure on Mead Johnson

Earlier this year, Reckitt acquired infant-formula business Mead Johnson, which both aids its goal of positioning itself as a consumer health company and helps it expand further into emerging markets, where a growing middle class is expected to demand more consumer products. Health and hygiene account for around 80 per cent of group revenue, while 40 per cent of revenue comes from emerging markets, and so the deal should fit in well with Reckitt Benckiser’s plans. Although Mead Johnson’s underlying operating margin fell half a percentage point to 19.9 per cent in the first half, this should turn around during the second half as more cost savings come through.

At the group level, the health division, which makes up 36 per cent of net revenue, saw like-for-like sales fall 2 per cent to £1.8bn. More colds and 'flu this year gave sales for Mucinex a boost, and gastro-intestinal products enjoyed good growth with Gaviscon in Turkey and Picot in Mexico. But this year's cyber attack and declines in Scholl/Amope offset gains made in other products. Hygiene, which makes up 44 per cent of revenue, saw like-for-like growth of 1 per cent during the first half. Dettol led growth across developed world markets, helped by the launch of a deep cleanse soap. Meanwhile, the group's involvement in the Banega Swachh sanitation campaign in India helped its Harpic product penetrate deeper into that market.

 

The fact that Reckitt is so geographically diverse has been in its favour given the decline in sterling. The majority of revenue and profits are earned outside the UK, which has helped insulate it from the worst of the currency's fall. At the half-year, the weakening of the pound versus many currencies added 12 per cent to growth, taking the total reported growth to 14 per cent for the period.

Strong free cash flow of almost £1.3bn in the half should allow the group to continue to increase the dividend. The adjusted operating margin for the half year improved by 30 basis points to 23.7 per cent, although strip out Mead Johnson and the increase became 50 basis points to 23.9 per cent, on the back of favourable input costs, pricing, and money saved through cost-efficiency programmes.

Yet the group has also been among those hit by a cyber attack. The strike wiped around 200 basis points off like-for-like sales growth during the second quarter as it left Reckitt unable to invoice and ship some of its orders. Some factory production was also affected, which will act as a drag on growth rates in the third quarter as factories attempt to return to their normal productivity. Management signalled that the full impact could cause like-for-like net revenue growth for the full year to come in at around 2 per cent, rather than the previously expected 3 per cent growth. But the group is taking steps to rid itself of the some of the virus, and so some revenue lost during the second quarter should be recovered in the third.

RECKITT BENCKISER (RB.)  
ORD PRICE:7,590pMARKET VALUE:£53.4bn
TOUCH:7,588-7,590p12-MONTH HIGH:8,108pLOW: 6,496p
FORWARD DIVIDEND YIELD:2.9%FORWARD PE RATIO:19
NET ASSET VALUE:1,123p†NET DEBT:178%
Year to 31 DecTurnover (£bn)Trading operating profit (£bn)Earnings per share (p)Dividend per share (p)
20148.842.19230139
20158.872.34259139
20169.892.62302153
2017**12.003.19285145
2018**13.783.67309157
% change+15+15+16+16
Normal market size:300   
Matched bargain trading    
Beta:0.74   
*Includes intangible assets of £30.1bn or 4,092p a share   **Berenberg forecasts