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Reckitt Benckiser - COVID-19 leads to a better year than expected

Emilie Stevens, Equity Analyst | 30 April 2020 | A A A
Reckitt Benckiser - COVID-19 leads to a better year than expected

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Reckitt Benckiser Group Plc Ord 10p

Sell: 6,178.00 | Buy: 6,181.00 | Change -11.00 (-0.18%)
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Reckitt Benckiser's first quarter net revenue of £3.5bn was 13.3% higher than the same period last year - reflecting an exceptional demand for its health and hygiene products.

As a result the group now expects 2020 to be better than previous guidance suggested. Although the group is unable to tell whether the increased demand will be sustained or will die down as stockpiling activity lessons.

The shares 3.3% following the announcement.

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Our View

Reckitt's portfolio of brands, includes Lysol and Nurofen, and in the current environment, that's working pretty well for them.

In stark contrast to last year's paltry sales growth of 0.8%, first quarter sales had bumper performance. Such growth is likely to have been beyond RB's wildest forecasts, and as a result the group expects a better year ahead.

However, Reckitt recognise that the current level of heightened demand may be short lived.

At the moment the group said it's proving difficult to distinguish between stockpiling, effectively bringing forward future sales, and an underlying increase in demand. Given a vaccine is at least a year away, and hygiene is showing to be a serious Covid defender, it's not implausible to think that sales will remain higher, but for how long and how high, is unclear.

2020 was already going to be a big year for Reckitt, with the group launching a strategy to find a way to sustainable revenue and profit growth. Coronavirus has provided a jumpstart but over the longer term RB still has it's work cut out.

Sales growth had been proving stubbornly low, 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. Turning a giant around is hard at the best of times and coronavirus will likely delay progress.

Unfortunately, the current environment has done nothing for one of Reckitt's headaches - Infant Child Nutrition. 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 have continued to struggle.

All in all we're not too concerned about Reckitt navigating the current disruption, although it won't be without ups and downs. We're more focussed on whether the group can build on the current momentum by growing sales and profits in the long run.

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First Quarter (constant currency)

Health net revenues were 13.6% higher than last year at £2.2bn. That reflects exceptional growth in demand in cough/cold remedies, supplements and Dettol products.

Within Health, Over the Counter saw a 32.9% increase, led by exceptional demand for Mucinex in North America and Neurofen in Europe, Australia and New Zealand. Other Health, which includes brands like Dettol and Durex, saw comparable net revenues rise 17.1%, driven by exceptional demand for Dettol offsetting declines in discretionary brands like Scholl. Infant and Nutrition comparable net revenues declined 1.6%, as a slow start in Greater China, offset growth in North America.

Hygiene net revenues of £1.4bn were 12.8% higher than the comparable period last year. North American net revenues were up 19.6% driven by Lysol sales which were up 50%. Europe/ANZ net revenues were up 10.6%, reflecting both underlying growth and COVID-19 demand and developing markets saw a rise of 8.4%.

COVID-19 is said to be impacting some of the group's early plans for their strategic overhaul, launched this year. However, Reckitt Benckiser says it's still on track to have new organisational structure in place by July 1 and deliver medium-term strategy of sustained mid-single digit organic revenue growth and mid-20's margins by 2025.

There has been no material change in the group's financial position since the Annual Report and Financial Statements 2019 were published on 6 April 2020.

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