Reckitt re­mains full of vi­tal­ity

Con­sumer health and hy­giene ti­tan’s com­pet­i­tive ad­van­tage re­mains in­tact

Shares - - CONTENTS -

Share price weak­ness at con­sumer health and hy­giene gi­ant Reckitt Benckiser (RB.) presents a not-to-be-missed buy­ing op­por­tu­nity for seek­ers of high-qual­ity, de­fen­sive stocks.

Short-term is­sues cur­rently weigh on sen­ti­ment to­wards the Det­tol, Durex, Gavis­con and Cil­lit Bang brands owner, yet we’re stay­ing pos­i­tive on Reckitt for its su­pe­rior in­no­va­tion skills, glob­ally-de­rived earn­ings and de­pend­able cash flow.


Sen­ti­ment to­wards the FTSE 100 man­u­fac­turer and dis­trib­u­tor of house­hold, toi­letry and phar­ma­ceu­ti­cal prod­ucts has soured amid down­grades caused by a weaker top-line per­for­mance.

Down­ward earn­ings re­vi­sions largely re­flect dis­rup­tion caused by a June cy­ber at­tack which meant or­ders ready to be shipped could not be sent. Some un­wind­ing of ster­ling weak­ness against the US dol­lar has also im­pacted es­ti­mates, while in­vestors are also ner­vous about the full fi­nan­cial im­pact from a hu­mid­i­fier scan­dal in South Korea, where con­sumers have boy­cotted Reckitt’s prod­ucts.


Reckitt’s trans­for­ma­tional £13bn ac­qui­si­tion of US baby for­mula maker Mead John­son Nu­tri­tion has also proved di­vi­sive. Bears point to head­winds faced in the US and China and Reckitt’s lack of ex­pe­ri­ence in in­fant nu­tri­tion; bulls to Reckitt’s in­creased em­pha­sis on higher mar­gin Health & Hy­giene cat­e­gories and en­larged emerg­ing mar­kets ex­po­sure.

Those im­pa­tient with the pace of sales re­cov­ery at Reckitt are also fac­tor­ing-in com­pe­ti­tion from lo­cal companies in emerg­ing mar­kets and the reemer­gence of cheaper pri­vate la­bel prod­ucts, par­tic­u­larly in the US amid the rise of dis­coun­ters and the on­line chan­nel.

But we’re in agree­ment with Beren­berg, which has re­it­er­ated (9 Oct) its ‘buy’ rat­ing and £85 price tar­get, which rep­re­sents 21% up­side from cur­rent lev­els for a busi­ness with high mar­gins, ex­cel­lent cash gen­er­a­tion, strong re­turns on in­vested cap­i­tal and a ro­bust bal­ance sheet.

Ac­knowl­edg­ing soft re­cent growth trends, Beren­berg doesn’t be­lieve Reckitt’s com­pet­i­tive ad­van­tage in in­no­va­tion and health has eroded and ex­pects ‘the top line to ac­cel­er­ate back to a sec­tor pre­mium’, also flag­ging up the £48.8bn cap’s proven abil­ity to ‘pre­mi­u­mise a cat­e­gory’.

Shares also wel­comes the sale (19 Jul) of Reckitt’s food busi­ness, in­clud­ing the French’s, Frank’s Red­Hot and Cat­tle­men’s brands, to US spices gi­ant McCormick for $4.2bn.

Divesti­ture pro­ceeds will be used to pay down debt aris­ing from the Mead John­son takeover, Beren­berg fore­cast­ing a re­duc­tion from a 2017 year-end £9.5bn to £8.1bn in 2018, then £6.66bn by the end of 2019. Even in the face of cur­rent head­winds, Beren­berg fore­casts im­proved earn­ings per share of £3.04 (2016: £2.24) and a £1.86 div­i­dend (2016: £1.53) this year, build­ing to £3.54 and £2.16 in 2018 re­spec­tively, a tes­ta­ment to Reckitt’s di­ver­sity and re­silience. (JC)

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