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Reckitt Benckiser - 'A good start'

Steve Clayton | 22 April 2016 | A A A
Reckitt Benckiser - 'A good start'

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Reckitt Benckiser Group Plc Ord 10p

Sell: 5,682.00 | Buy: 5,685.00 | Change -541.00 (-8.69%)
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RB reports "a good start to the year" in their Q1 trading statement. RB is on-track to meet full year targets of 4-5% like-for-like (LFL) revenue growth and moderate expansion in profit margins. The shares were unchanged in early trading.

Europe North America:

European and Australasian markets were strong, delivering 5% LFL revenue growth. North American LFL revenues rose by 1%, the result held back by retailers destocking of flu-related products as a result of a weak flu season over there. Overall, the division delivered 3% LFL revenue growth.

Developing Markets:

Growth remained strong in India and China, but Brazil was tougher, offset by strong demand for Pest control products in the face of the Zika virus spread. Africa grew modestly. Overall, the division generated 10% LFL revenue growth.

Product Categories:

Health (34% of net revenues) saw 10% LFL revenue growth, with RB highlighting good performances from Durex, Gaviscon and Strepsils, but presumably not from the same customers.

Hygiene (42% of net revenues) saw strong growth from Dettol/Lysol and Harpic in India, whilst the latest Finish dishwashing innovation, supercharged powerballs, no less, proved successful. Overall, LFL revenues rose 3%.

Home (18% of net revenues) saw 3% LFL gains, with good growth from Air Wick and Vanish.

CEO Rakesh Kapoor commented:

"We had a good start to the year despite continued challenging market conditions. We are pleased to see growth across both developed and developing markets as we pursue our strategy of focusing on the health and hygiene powerbrands in our key powermarkets, supported by continued investment in innovation".

Our view:

There aren't many companies that can raise sales and margins year in, year out, in almost any economic environment. But Reckitt Benckiser (RB) has done just that over the last 10-15 years. 2015 was another excellent year.

RB's business model acts like a virtuous cycle. It has 19 Powerbrands (examples include Dettol and Nurofen) which are sold in almost 200 countries, account for more than 80% of sales and attract the highest margins. Every year RB invests more behind marketing these brands and introducing new innovations. This drives sales and margins, allowing more to be invested behind the brands. The cycle repeats.

RB's focused portfolio helps to explain why it is outperforming its peers. Procter and Gamble has too many non-core brands. It is having to slim down and restructure, and as a result has struggled to grow sales and profits over recent years. Unilever's performance has been better, but again it has a lot of brands that aren't really doing very much, which only serve to increase the complexity of the business. RB doesn't have a long tail of stale brands.

Margins are being helped along by Project Supercharge, which is creating a simpler, more agile organisation. This has delivered £100m of cost savings in its first year; with a further £50m of savings targeted over the next two years. Lower commodity prices are also helping.

The shares, on a forecast PE of 23.8x are trading at around a 40% premium to their long run average, but the balance sheet is in good shape. We wouldn't be surprised to see RB looking to bring new brands into the portfolio. Historically, such deals have been very well received.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.