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Reckitt Benckiser struggling at the margins

The group is still suffering from the cyber attack last year, but has revised up synergy expectations for the Mead Johnson Nutrition acquisition
February 20, 2018

Consumer goods giant Reckitt Benckiser (RB.) has been overhauling its portfolio as part of its shift towards the health and hygiene business. Two recent deals, namely the acquisition of Mead Johnson Nutrition (MJN) and the sale of the RB Food business have skewed the full-year numbers. On a like-for-like basis revenues were flat for the year, sending the shares down 7.5 per cent on release of the results. And although shareholders can take some comfort from the 10 per cent rise in adjusted earnings per share to 317p, that was shy of City expectations.  

IC TIP: Buy at 6212p

The acquisition of MJN has shifted the group’s revenue mix towards the health business. It accounted for 44 per cent of net revenue in 2017, from 34 per cent in 2016. The integration of MJN is progressing ahead of schedule with $25m (£17.9m) of synergies delivered earlier than planned. The expected savings from the deal have similarly been revised up to $300m from the $250m predicted when the company (a US-based infant formula business) was acquired.The acquisition led to a massive jump in net debt, to £10.7bn from £1.4bn in 2016. Luckily, free cash flow at the group remains strong, reaching £2.1bn in the year, from £1.9bn the year before.

Adjusted gross margin decreased slightly through the period, with the base business down by 20 basis points as a result of higher commodity prices and tough price competition, although this was offset to an extent by the change in business mix following the consolidation of MJN. Despite the drop, management is expecting improvements in the gross margin over the medium term, thanks to further shifts in the business mix towards consumer health, innovation and “Project Fuel”, a cost-cutting programme.

Performance in the year was affected by the cyber attack the group suffered in June. Exposure to the 'NotPetya' ransomware attack meant its ability to manufacture and distribute was disrupted. The attack contributed to a 3 per cent decline in like-for-like revenues in the group’s ENA division, which encompasses Europe, North America, Australia and New Zealand. The attack also disrupted business in India, which was already impacted by the introduction of the goods and services tax.

Analysts at Raymond James are forecasting adjusted EPS of 343p in 2018 (from 323p in 2017).

RECKITT BENCKISER (RB.)  
ORD PRICE:5,900pMARKET VALUE:£41.5bn
TOUCH:5,900-5,901p12-MONTH HIGH:8,108pLOW: 6,133p
DIVIDEND YIELD:2.8%PE RATIO:12
NET ASSET VALUE:1,923p*NET DEBT:79%
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20139.271.86195137.0
20148.842.13231139.0
20158.872.21244139.0
2016**9.482.25246153.2
201711.52.50481164.3
% change+21+11+96+7
Ex-div:12 Apr   
Payment:24 May   
*Includes intangible assets of £29.5bn, or 4,189p a share     **Restated