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Reckitt Benckiser - strong hygiene sales and guidance upgraded

Sophie Lund-Yates, Equity Analyst | 20 October 2020 | A A A
Reckitt Benckiser - strong hygiene sales and guidance upgraded

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Reckitt Benckiser Group Plc Ord 10p

Sell: 6,386.00 | Buy: 6,390.00 | Change 76.00 (1.20%)
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A 13.3% rise in like-for-like sales (which ignores the effect of exchange rates and changes to the portfolio) took third quarter revenue to £3.5bn. That reflects strong growth from disinfectant and hygiene brands, and particularly good trading in North America.

This means Reckitt is upgrading full year like-for-like net revenue growth guidance. Percentage growth is now expected to be in the low double digits, up from high single digits.

The shares rose 1.8% following the announcement.

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Our View

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

In stark contrast to last year's paltry sales growth of 0.8%, sales are enjoying a 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.

The group thinks the current crisis will translate into a long-term behaviour shift. This would see consumers continue to be more hygiene focused, and provide an enduring boost to Reckitt's top-line. Over-the-counter medicines like Nurofen have fared less well. While sales were initially boosted by coronavirus, the group's mindful that these purchases will have simply been a pull-forward of later sales. The net effect of these trends remains to be seen, but overall the current crisis is being seen as an opportunity at Reckitt HQ.

The jumpstart comes as Reckitt is looking for ways to propel sustainable, long-term sales and profit growth. And while helpful, the pandemic is not a cure-all. 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.

Reckitt's solution is a £2bn investment in improving and sharpening its proposition. Deep pockets should give the group an edge- cooking up superior products is what supports brands' premium price tags, which should ultimately underpin margins. To the group's credit, we'd been concerned coronavirus could hamper progress. But Reckitt seems to be making genuine headway on improving supply chains and stock availability already - both crucial if you want to grow sustainably. We're mindful that while the group's moving in the right direction, turning a beast of Reckitt's size around is going to take time, and comes with significant execution risk.

Unfortunately, the current environment hasn't done enough to solve Reckitt's biggest headache - 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. While the worst of the impairments should be a thing of the past, sales are still lacklustre and a lower birth rate in Asia looks set to act as a drag as we head into next year.

We're not concerned about Reckitt navigating the current disruption. The biggest question from here is whether current momentum will in fact translate into a long-term tail wind. That's unknowable at this stage. A price to earnings ratio some way above the long-term average means there is pressure for Reckitt to capitalise on its newfound opportunities. If it fails to do this, the market could reassess its value.

Reckitt Benckiser key facts

  • Price/Earnings ratio: 22.9
  • 10 year average Price/Earnings ratio: 15.6
  • Prospective dividend yield (next 12 months): 2.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Q3 interim management statement details (constant currency)

Within Hygiene (42% of net revenue) brands like Lysol, Finish and Air Wick helped like-for-like (LFL) revenue rise 19.5% to £1.5bn. Volumes were up 18.2%, while average prices rose 1.3%. Performance is being driven by more people staying at home compared to last year, and a heightened interest in cleanliness because of coronavirus. The group also said it's seeing new customers switching to its branded products.

Health (35% of net revenue) saw LFL revenue rise 12.6% to £1.2bn, comprising a 9.1% improvement in volume and a 3.5% increase in average prices. Very strong demand for disinfectants helped the top line - Dettol sales rose 50%. Relaxations of social distancing regulations resulted in improved demand for Durex products, which rose by double digit percentages.

Sales of over the counter medicines fell 10% because of lower consumer demand in lockdowns, and retailers already having enough stock ahead of cold/flu season. Reckitt expects "trading over the balance of the season to remain supressed."

Nutrition (23% net revenue) posted LFL growth of 4.1% to £806m, driven mostly by higher average prices. There was particularly strong growth in North America in Infant Child Nutrition, although these tailwinds are expected to reverse in Q4. Conditions in Hong Kong are still tough, with the cross border sales of goods with China still supressed.

The division is expected to be adversely affected by lower birth rates next year, driven by changes in behaviour because of the pandemic.

Across the group as a whole, online sales rose 45% in the quarter and now account for around 12% of group sales.

On a geographical basis, Developing Markets LFLs rose 10.1% to £1.3bn, Europe, Australia and New Zealand saw LFLs rise 8.2% to £1.1bn, and North America was up 24.2% also to £1.1bn. In all cases improvements were mostly driven by volume increases, but this was most pronounced in North America.

The group's on track to invest £2bn over three years in its turnaround plans, and so far this year that's included spending to improve supply chains. This resulted in noticeable improvements in customer service and stock availability. The investment plans are being supported by cost savings of £300m so far this year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.