Reckitt Benckiser (RB) has enjoyed another strong quarter, with like-for-like (LFL) sales growth accelerating to +7% in Q3, up from +5% in the first half. Double digit growth in emerging markets was a highlight, given concerns over slowing economic growth in these regions, while the Health category once again impressed. Given the strong Q3 performance RB has increased its full year revenue target from +4-5% to growth of +5%. The shares were 2-3% higher in early morning trading.
Progress by Region (LFL basis):
- Europe & North America (65% of net revenue): Sales grew by 6% in Q3 and are up 5% year-to-date (YTD), with growth broadly based across all key geographies.
- Developing Markets (31% of net revenue): Sales grew by 10% in Q3 and are up 8% YTD with good growth in China, the Middle East and Turkey more than offsetting weakness in South East Asia, Africa and Brazil.
- Food (4% of net revenue): Sales up 3% in Q3 and YTD.
Product Category Review:
Sales growth accelerated across all categories in Q3. Health led the way with 14% LFL growth (+13% YTD) driven by a strong performance from the Scholl / AmopÃ© franchise, Nurofen, Strepsils and Durex. The Hygiene, Home and Portfolio Brand categories all grew by mid-single digits in Q3.
Rakesh Kapoor, Chief Executive Officer, commented:
"Our strategy for growth and outperformance, focused on Powermarkets and Powerbrands continues to deliver... Markets remain challenging, but with +6% like-for-like growth on a year to date basis behind us, we are able to raise our full year LFL revenue target to +5%, and therefore remain poised for another year of growth and margin expansion."
Few companies can boast a better long term track record than Reckitt Benckiser. Sales have compounded at 8% p.a. and operating profits by 11% p .a (adjusting for the pharmaceutical disposal) over the last couple of decades, with the share price rising from around £7, to the current level of over £60. Despite slowing growth in emerging nations (c. 1/3 of sales) , the business continues to trade strongly, with growth from these regions accelerating in the third quarter. This demonstrates the resilience of RB's brands and its ability to drive growth by investing behind them.
Reckitt recently demerged its pharmaceuticals business to become a pure consumer products company, earning most of its sales from Healthcare and Hygiene products. Powerbrands, those with above average growth potential, make up over 80% of sales. Above all else, Reckitt is a marketing machine, which works relentlessly to introduce new variants of its brands and bring them to a wider audience.
Currently, the balance sheet is very strong. Net debts are expected to be around £1.7bn at the end of this year, compared to cash profits (EBITDA) of £2.4bn , so Reckitt has fire power for mergers and acquisitions. A buy-back up to £500m of stock in the meantime will absorb some of the spare cash flow. Dividends have risen every year for over a decade and analysts are forecasting more growth to come, after a rebasing this year to reflect the pharmaceutical demerger.
If we had one gripe it would be that the shares are quite a lot dearer than they have been historically. The prospective price to earnings ratio (P/E) is 24.8x versus a long run average of nearer 17x. Then again, RB keeps delivering, and it possesses a great stable of brands which should be capable of growing for many decades into the future although of course there are no guarantees.
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