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Reckitt Benckiser - Shares fall as sales guidance lowered

Equity research team | 19 October 2016 | A A A
Reckitt Benckiser - Shares fall as sales guidance lowered

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Reckitt Benckiser Group Plc Ord 10p

Sell: 5,827.00 | Buy: 5,829.00 | Change -77.00 (-1.30%)
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Shares fall as sales guidance lowered

Growth rates have softened in Korea following the confirmation that a RB product was responsible for spate of fatal lung problems. With sales also weak in Russia and some new innovations not performing as expected, the group has dropped full year like-for-like sales growth targets to 4%, the lower end of previous guidance. The shares fell by 3% on the news.

Our View

With interest rates low and uncertainty swilling around the UK and wider global economy, investors have been drawn to consumer goods companies because of their resilience. Many, such as Reckitt Benckiser (RB) itself, have an excellent track record of increasing profit margins and raising dividends year after year.

What has set RB apart from its sector peers in recent times is its concentrated portfolio of brands. It has 19 Powerbrands (examples include Dettol and Nurofen) which are sold in almost 200 countries. These 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 creates a virtuous cycle by raising sales and margins, allowing more to be invested behind the brands.

Margins are also 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 by the end of 2017.

Problems in Korea and Russia have impacted sales recently, and the group expect conditions in these markets to remain tough for some time. Reckitt has set aside £300m in relation to the tragic deaths in Korea, and although the group says that there has been no material changes to expectations for their liabilities, further governmental action is possible.

Overall the business remains in good shape, with the shares trading on a forward PE of 22.9x. This may be a 29% premium to their long run average, but we see little chance of the conditions that have driven investors to more defensive shares like RB changing in the short-term. Analysts expect profit before tax to grow by over 20% a year out to by 2019, and while the prospective yield is just 2.3% next year, the potential for a rising payout is clear.

Q3 Trading in detail

Group net revenue in the quarter increased by 17% to £2.6bn, driven by favourable currency moves. Like-for-like (LFL) sales growth in the period was 2% at constant currency rates, behind the year to date rate of 4%.

In the ENA (Europe, North America, ANZ) region, LFL sales were flat. While outlook for Russia remains uncertain, European markets showed resilience in slowing market conditions and the group reports strong growth in the US Durex / KY franchise. Progress was held back by a lower than expected uptake in Scholl/Amopé products. ENA accounts for 65% of net revenue

DvM (developing markets) LFL growth of 7% was assisted by a good performance in China and India, while sales in Korea are weaker following the HS issue. The HS issue has adversely impacted group LFL performance by around -1.5% in the quarter and DvM by mid-single digits. DvM accounts for 31% of net revenue.

The Foods division (4% of net revenue) saw continued solid growth, with a good performance from French's Ketchup in Canada helping LFL sales up 6%.

Strong sales from Dettol and Finish helped LFL sales in the group's largest product division, Hygiene, to rise by 5%, in line with the growth rate for the year. The weakness in Scholl/Amopé limited LFL sales growth in Health to 2%, behind the 6% rate seen for the year as a whole. The HS issue has impacted Home, with LFL sales falling 2%.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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 disclosure for more information.