Reckitt reported third-quarter net revenue of £3.6bn, reflecting like-for-like (LFL) growth of 7.0% (6.4% expected). Its core operations drove the beat, helped by strong double-digit growth in emerging markets and a return to growth in North America and Europe.
Performance in its non-core operations was mixed, with strong growth at Mead Johnson Nutrition more than offsetting a decline in its Essential Home business.
Full-year guidance has been maintained, with LFL net revenue growth of more than 4% expected in its core business.
A quarter of the ongoing £1bn share buyback programme has been completed.
The shares were broadly flat in early trading.
Our view
Reckitt delivered a strong third-quarter performance, with headline numbers beating market expectations thanks to continued strong momentum in emerging markets. Despite the impressive performance, a lack of upgrades to full-year guidance caused a muted share price reaction on the day.
Restructuring and selling underperforming assets is something that’s becoming a trend in the consumer goods space these days. Several ‘non-core’ home care brands are already on the auction block, and with a $4.8bn sale already agreed for its Essential Home unit, these should start to become less of a drag on performance next year.
The sale should free up cash to invest in higher-returning parts of the business. And around $2.2bn of excess proceeds from the sale look set to be returned to shareholders through a special dividend. Although, no returns are guaranteed.
If the remaining exit from Mead Johnson is executed well, that’ll leave behind a concentrated collection of the group’s best brands, 11 of which will make up around 70% of the streamlined Reckitt’s total sales. These include global names like Vanish, Durex and Dettol and have a relatively even split across Europe, the US and Emerging Markets.
We like the idea - the bigger-is-better approach of the past is gone, and focusing on areas where Reckitt has market leadership should help drive better sales growth going forward. This collection of core brands has a history of outperformance and should be able to attract higher margins.
Portfolio changes, along with cost cuts, have helped gross margins return to historic levels. While we’re happy to see progress, there’s a slight worry that a focus on costs and gross margins is a temporary fix. To sustain longer-term growth, we’d like to see more of a focus on finding new distribution and increasing market share.
Emerging markets will continue to be the main growth driver going forward. The opportunity is huge, so we see a long runway for further growth here if the group can execute well. Developed markets remain a tougher battleground, but we’re pleased to see a return to positive territory here. Reckitt isn’t calling for caution in these markets like many of its peers, so we’re hoping that recent momentum can continue into the new year.
The balance sheet's in reasonable health, and with a history of delivering healthy free cash flow, the 3.7% forward dividend yield looks well covered. Although, there are no guarantees.
We can see the vision, and the valuation doesn’t look too demanding to us, given its host of power brands. But investors will need patience. Reckitt’s transformation still has some major hurdles to overcome, including offloading some of its non-core assets, which adds risk.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Reckitt’s overall management of material ESG issues is strong.
Reckitt’s corporate responsibility committee oversees its ESG strategy, with progress reported in the annual Sustainability Insights Report, focusing on 19 areas like ethical business, product safety, and waste management. The company has strong anti-bribery policies and initiatives, including regular employee training and external audits, to ensure product safety. However, gaps in reporting persist, particularly around external quality management certification for Reckitt’s sites and suppliers.
Reckitt key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.