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Reckitt Benckiser - Full year guidance cut

Nicholas Hyett | 22 October 2019 | A A A
Reckitt Benckiser - Full year guidance cut

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Reckitt Benckiser Group Plc Ord 10p

Sell: 5,951.00 | Buy: 5,954.00 | Change -59.00 (-0.98%)
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Reckitt Benckiser has reported modest like-for-like (LFL) sales growth of 1.6% in its third quarter. That's half of what the market was expecting, with particular problems in the Health division.

Reckitt cut full year LFL growth targets again to 0-2%, down from 2-3% at the half year, and operating profits margins are also expected to shrink.

The shares fell 4.7% following the announcement.

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Our View

Reckitt is a consumer goods group that makes household products from Nurofen to Dettol.

The traditional core of the business has generated reliable cash flows, driven by a diverse customer base buying small, everyday items. Added to that, a tried and tested formula of marketing and product innovation has helped sales, profits and dividends rise over the years.

But RB has strayed from its well-trodden path more recently. The $18bn acquisition of Mead Johnson (MJN), a baby formula specialist, raised eyebrows back in 2017. It marked entry into unfamiliar markets and unfamiliar products. A string of operational issues has weighed on margins, and demand for MJN baby formula in China isn't flying.

Unfortunately the disease seems to have spread to the broader Health business. It's growing slower than its wider market, thanks in part to greater caution from its retail partners, but price competition is heating up too. It's far too early to diagnose a crisis, but we worry Reckitt's brands may be losing some of their pulling power.

There have been other problems too. The sale of faulty products in Korea up to 2011 led to serious injury and the death of a number of people, and the number of compensation claimants continues to rise.

Fortunately there are some brighter spots. The settlement for Reckitt's past sale of opioid addiction treatments has finally been put to bed. The $1.4bn price tag was higher than some expected, but the group had already warned its original provision would likely need to be significantly increased. It means incoming CEO, Laxman Narasimhan, has one less thing to worry about.

We think near-term fortunes rely on MJN, and the group's ability to stabilise margins. Other news that could move the dial includes if Narasimhan decides to split the business into two. We expect he will want to have his feet under the table for a little while before making any decisions, but investors will inevitably be watching this space.

The shares currently trade on 16.6 times expected earnings, a touch above the longer-term average, and offer a prospective yield of 3%.

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Third Quarter Trading Statement

Revenue growth in the quarter reflects 3% growth in prices and product mix, with overall volume actually falling 1%.

The Health segment (60.9% of revenues) recorded a small slowdown in LFL sales of -0.3%. That was led by North America where LFL sales fell -12.3%. Infant Child Nutrition was the only major Health segment to report positive sales growth, however even here the group's losing market share in the key Chinese region. Durex and Dettol, meanwhile, returned to growth but remain below their historic run rates.

Hygiene Home offset the struggling Health segment, with LFL revenue growing 4.5%. Although all markets delivered a positive performance Developing Markets led the charge with 11.3% LFL growth. This was underpinned by strong performances from Harpic in India and Finish in China.

Reckitt's financial position did not change materially during the quarter. The group's paid $1.2bn of its $1.4bn Indivior related settlement, with the balance due in Q4.

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