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Reckitt Benckiser - Mead Johnson drives upgrade

Nicholas Hyett | 27 July 2018 | A A A
Reckitt Benckiser - Mead Johnson drives upgrade

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Reckitt Benckiser Group Plc Ord 10p

Sell: 6,550.00 | Buy: 6,554.00 | Change -24.00 (-0.37%)
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Headline revenues jumped 30% in the first half to £6.1bn, with operating profits of £1.3bn up 29%. Those bumper numbers are being driven by the acquisition of infant formula specialist Mead Johnson in June last year. Underlying growth was also positive at 4%.

The interim dividend has been set at 70.5p per share, up 6% on last year.

The shares rose 6.9% in early trading.

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Our View

Volume growth is particularly pleasing. Ultimately there's only so far you can push the price of bleach - however strong the brand. Eventually you need to find new customers. 5% volume growth in hygiene this year suggests Reckitt is doing just that.

Admittedly some of RB's brands are still struggling. Scholl in particular has been a serial underperformer in recent times - apparently the appeal of an electric sander for your heels is not what it once was (and frankly we're not surprised).

It's too early to say whether better numbers are the start of a trend, but the shares have started to pick up nonetheless. A PE ratio of 18.3 is above the group's ten year average, although still some way below the 25+ shares were trading on back in 2016.

The litmus test will be the performance of recently acquired formula milk specialist Mead Johnson.

The rationale behind the deal is sound enough. Around half of Mead Johnson's sales are generated in Asia, a region to which Reckitt was arguably underexposed, and these emerging economies should be capable of growth for years to come.

We can expect $300m 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.

However, for all their size, the acquired brands are hardly stellar. Sales growth struggled in the years before the acquisition, and the deal will require more work than a straightforward addition to the portfolio. Early signs are promising, with the top line starting to tick up nicely.

Margins are potentially a source of concern though. And there are also valid concerns about how Mead Johnson's market and geographies are unfamiliar to Reckitt's - particularly China. With a price tag of $17.9bn, Mead Johnson would be an expensive mistake.

But it would be foolish to ignore the group's track record. Over the long-term, Reckitt has been able to leverage established brands to build margins and cash flow. The dividend has grown 560% in the last 15 years as a result, although dividend records as exceptional as this are not guaranteed to be repeated.

The shares currently offer a prospective dividend yield of 2.7%.

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Half Year Results

Volume and price both contributed to underlying revenue growth, with adjusted operating margins up 0.5 percentage points to 23.6%.

The Mead Johnson Infant Formula and Child Nutrition business saw second quarter sales rise 9% to £741m. That reflects a strong performance from e-commerce and specialist sales channels in the US and China. China in particular delivered growth in the mid-teens with both volume and mix contributing.

The rest of the Health business saw sales rise 2% in the quarter to £1.1bn, with good results from the like of Strepsils and Neurofen offset by weakness in Scholl. A stronger performance by Dettol in India helped to offset macro weakness in the Middle East.

Hygiene and Home sales of £1.1bn represent a 4% improvement - led by increased sales volumes. The division benefitted from a seasonal boost to Lysol sales in the US and new innovations within the Finish and Air Wick brands.

Net debt was unchanged on the year end at £10.7bn.

The strong showing from Mead Johnson has led the group to upgrade its's full year net revenue target by one percentage point to 14-15%.

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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.

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.

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