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Reckitt Benckiser - announces result of strategic review

Sophie Lund-Yates, Equity Analyst | 27 February 2020 | A A A
Reckitt Benckiser - announces result of strategic review

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Reckitt Benckiser Group Plc Ord 10p

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Reckitt has recognised a £5bn impairment charge against the value of the child nutrition business. Excluding this, full year operating profit was down 1.9% at £3.4bn, reflecting weaker margins from increased investment in brands.

The group also announced the result of its strategic review, and will spend £2bn over three years to "rejuvenate" its proposition.

A final dividend of 101.6p takes the final payment to 174.6p per share, up 2.3% on last year. The board now expects the dividend to remain at this level in the near term.

The shares fell 3.8% following the announcement.

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Our View

Reckitt's portfolio of brands, including Lysol and Nurofen, is losing its pulling power.

Sales growth under 1% is a far cry from the punchier growth you'd usually expect from a brand giant. The slowdown is partly because the consumer goods landscape has changed. Digital marketing has lowered the barriers to entry for launching a new brand, leading to an influx of market-share-stealing smaller companies and fierce price competition.

To that end, Reckitt's planned £2bn investment in improving and sharpening its proposition makes sense. Deep pockets should give the group an edge- cooking up superior products is what supports brands' premium price tags, which should ultimately underpin margins. But while Reckitt has the right ideas on paper we can't rule out further ups and downs. It takes a lot of effort to turn a giant around.

This isn't Reckitt's only headache. 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 and weakening demand in China has resulted in hefty impairments and sales continue to struggle.

Adding to the headache is coronavirus, which has the potential to cause further disruption.

There are some brighter spots though. The Hygiene & Home division is faring better, helped by better prices and a rapidly growing consumer base in emerging markets. That's led to some speculation that the group could split into two separate Health and Hygiene companies. Laxman Narasimhan doesn't seem in a hurry to initiate a split yet, but it's one to watch.

All-in-all Reckitt's spinning a lot of plates. The group's got hard work ahead and the story is now one of execution. 2020 will be about laying foundations for the future, but Reckitt doesn't yet have its house in order.

The shares currently change hands for 18.7 times earnings, broadly in line with the ten year average, and a prospective dividend yield of 2.8%, prior to full year results.

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Full year results (constant currency)

Underlying net revenue rose 0.8% to £12.8bn, broadly in line with market expectations, and includes a 0.8% rise in like-for-like sales.

Health saw lower volumes due to market share loss and retailers destocking. Improved pricing and mix of products failed to fully offset this, so sales declined 0.9% to £7.8bn. On an adjusted basis operating margins fell to 26.7% from 28.5%, and operating profit declined 7.7% to £2.1bn.

Issues in Infant Child Nutrition are being driven by a difficult Chinese market, including lower birth rates and increased domestic competition.

Within Hygiene Home sales rose 3.6% to £5.0bn, growth was broad based across all leading brands, including names like Finish and Lysol. Operating profit rose 9.2% to £1.3bn.

The £2bn investment in the business will be funded by a combination of cost savings, a recurring £200m investment from 2020 and a one off transformation cost of £250m. Capital expenditure will also be higher for the next two years, at around 4% of net revenue.

Reckitt also said the dividend will be held at 2019's level until it rebuilds dividend cover (earnings per share divided by dividend per share) to around 2 times.

Given the non-cash nature of the child nutrition impairment charge, free cash flow improved slightly on last year to £2.1bn despite the weaker profitability. As a result net debt was broadly flat at £10.7bn.

During the year Reckitt agreed to pay £1.1bn "to fully resolve all federal investigations into the Group in connection" to the Indivior case in the US - this has now all been paid.

2020 is a "transitional year" and operating margins will be around 3.5 percentage points lower than 2019.

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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. 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.