Reckitt Benckiser Group Plc (RB.) Ord 10p
HL comment (2 May 2019)
Reckitt Benckiser's (RB) total sales rose 1% to £3.2bn in the first quarter, slightly behind analyst expectations
The shares fell 1.4% following the announcement.
RB said it remains on track to deliver full year targets of 3%-4% LFL revenue growth.
The tried and tested double act of marketing and product innovation has helped sales, profits and dividends rise.
Admittedly, not all of the brands are flying (Scholl has been a serial underperformer in recent times) but when you run a stable of 18 powerbrands there's always going to be one or two bucking the wider trend.
This performance has helped the shares recover from 2018 lows. The current valuation is 17.3 times expected earnings - below its ten year average and some way below the 25+ times the shares were trading on in 2016.
Growth remains steady but there are some external risks to consider. The sale of faulty products in Korea up to 2011 led to serious injury and the death of a number of people, and the number of claimants continues to rise. Added to that, there's an ongoing US investigation related to Indivior, a business Reckitt owned until 2014. These claims relate to the potentially unlawful sale of drugs used to treat opioid addiction.
£431m has been put aside for these problems. And there's a chance this number will climb.
Within ongoing operations, the recently acquired Infant Child and Nutrition business is central to the group's near-term fortunes. Many of its markets are unfamiliar to Reckitt, but after a difficult start it's starting to gain traction. Investors will need to see that continue because while there's a good opportunity for growth, the acquisition has stretched the balance sheet.
Still, we think Reckitt's book of brands means it should be able to make it over the bumps in the road.
Over the years, the group has built an impressive track record. It's been able to leverage established brands to build margins and cash flow, with the dividend growing 500% since 2003 as a result. Exceptional results such as these are not guaranteed and should not be seen as a guide to the future.
First Quarter Trading Update
Infant Formula and Child Nutrition delivered Q1 sales of £758m. Like-for-like (LFL) sales were 5% ahead, with strong trading in North America offsetting challenges in China.
Other Health LFL sales were flat, with 1% reported growth, to £707m, coming from favourable exchange rate changes. Dettol grew well in both developed and emerging markets, but performance from Scholl continues to be weak.
Over the Counter sales declined 9% to £470m. That comes from a disappointing cold and flu season in key markets, and the effect of retailers reducing the amount of stock they hold. Products from Nurofen and Gaviscon performed well in the period.
Hygiene and Home LFL sales were 3% ahead at £1.2bn, despite a slight headwind from FX movements. Growth was driven by increased prices, as Reckitt focused on premium innovation.
On a regional level, Developing Markets delivered strong underlying LFL sales growth, while underlying sales in Europe, Australia and New Zealand were flat in the period, and North America saw growth of 2%.
The group remains involved in investigations and litigation proceedings in the US around Indivior, a business it owned until 2014. It warned the final cost could be substantially higher than the current $400m provision.
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.
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