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Reckitt Benckiser - A soft quarter means guidance lowered

George Salmon | 18 October 2017 | A A A
Reckitt Benckiser - A soft quarter means guidance lowered

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Reckitt Benckiser Group Plc Ord 10p

Sell: 6,042.00 | Buy: 6,044.00 | Change 11.00 (0.18%)
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Group net revenue was £3.2bn, up 30%. However at constant currency rates and excluding the Mead Johnson acquisition, this represents a 1% fall in like-for-like (LFL) sales, continuing the trend from the first half.

Consequently, the group is now targeting a flat LFL performance in the RB base business this year, down from 2% earlier in the year. The shares fell 1.5% on the news.

Our view

Recent results have been a touch disappointing. In fact, RB needs to have saved its best quarter for last if it's to meet its revised target of flat LFLs this year.

Other recent headwinds have included a cyber-attack and a pair of £300m+ provisions, relating to customer redress in Korea and an ongoing US Department of Justice investigation. This means the near-term outlook for this consumer goods giant is not as rosy as it has been.

However, in the long-term, we still think there's much to like. Well established brands, a track record of margin growth and solid cash generation is a great combination, and means analysts expect the dividend to rise by around 10% a year in the next three years. The current prospective dividend yield is 2.6%.

It's not all been bad news either. Investors will have been pleased that performance at the recently acquired infant nutrition business Mead Johnson, which came with a $17.9bn price tag, was solid, if unspectacular.

The takeover increases the importance of the Health division, so much so that Reckitt is restructuring its business to something that resembles Health plus Mead Johnson in one division and 'the rest' in another.

The rationale behind the deal is sound enough. Around half of Mead Johnson's sales are generated in Asia, and these emerging economies should be capable of growth for years to come. We can expect £200m per annum of cost synergies by 2020, while Reckitt's impressive cash generation should mean it can easily stomach the extra debts taken on to fund the deal. Nonetheless, this does clearly bring extra risk, especially given Mead Johnson's brands have struggled in recent years.

A more challenging environment in many markets, combined with uncertainty over the acquisition, means the group trades on 19.4 times expected earnings, a slight discount to its 5 year average.

Third quarter trading update

Health business, which makes up 50% of net revenue, saw net revenue rise to £1.6bn as a result of the Mead Johnson acquisition. However, LFL sales fell 2%. Continued weakness of the Scholl/Amopé brand and supply problems associated with the cyber-attack more than countered good performances from Durex and Gaviscon. It was a similar story in Home (15% of net revenue) as LFL sales fell 4% in the quarter.

Hygiene (33% of net revenue) and the smaller Portfolio Brands division (now only 2% of net revenue) following the $4.2bn sale of the Food business in August, both saw LFL sales growth. This was 1% in the Hygiene division, as a weak quarter for Dettol offset strong growth from Finish.

Across the RB business geographic trends were much as they have been so far this year. LFL sales in North America dipped 2%, with Europe and North America (53% of net revenue) as a whole falling 3%. Strong growth in China and Turkey offset weakness in India, meaning LFL sales in developing markets (25% of net revenue) rose 3%. The remaining 22% comes from the recently acquired Mead Johnson business.

Reckitt says good progress has been made on the integration, and sales rose 1% at constant currency. Looking ahead, the group is to merge Mead Johnson into an expanded RB Health division, with the remainder of the business combined under the RB Hygiene Home umbrella.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.