Reckitt reported first-half net revenue of £7bn, reflecting like-for-like (LFL) growth of 1.5%. 4.2% growth in its core operations more than offset declines in non-core units that include Essential Home, for which a disposal of approximately $4.8bn has since been agreed. On a regional basis, Emerging Markets grew by 12.8% with Europe and North America both showing low single-digit declines.
Like-for-like volume and price growth accelerated through the period helping underlying sales in the second quarter increase faster than market forecasts.
Underlying operating profit grew by 7.0% ignoring exchange rates to £1.5bn, reflecting both top-line growth and efficiency gains.
Free cash flow fell 24.1% to £623mn, negatively impacted by restructuring costs. Net debt was up £0.3bn to £8.4bn.
The interim dividend rose 5% to 84.4p, and a £1bn buyback has been announced.
Full-year core LFL net revenue guidance has been upgraded from 3-4%, to over 4%.
The shares were up 9% in early trading.
Our view
Reckitt’s sales growth accelerated over the first half, helped by a much better-than-expected performance in Emerging Markets. This momentum’s expected to continue into the second half, leading management to up its guidance, and the shares reacted positively 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.
Shipping off Mead Johnson could also help alleviate some valuation pressure. There are hundreds of ongoing court cases in the US relating to its infant baby formula. Recent case developments add uncertainty, with an overturned ruling weighing on sentiment and posing an ongoing risk.
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.
The balance sheet's in reasonable health, and with a history of delivering healthy free cash flow, the 4.3% 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. But investors will need patience. Reckitt’s transformation still has some major hurdles to overcome, and weak performance, plus ongoing court cases from the units with a for-sale sign attached to them, 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.
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