Reckitt Benckiser Group Plc (RB.) Ord 10p

Reckitt has reported flat like-for-like (LFL) sales in its second quarter, as falling sales in the key Health division offset growth in Hygiene Home. The group has lowered full year LFL growth targets to 2-3%, down from 3-4%.

The shares fell 5.4% following the announcement.

An interim dividend of 73p per share will be paid, which is 4% ahead of last year.

Our View

Reckitt is a consumer group that makes household products from Finish dishwasher tablets to Dettol sprays.

The traditional core of the business has enjoyed reliable cash flows, driven by a diverse customer base reliably buying small, everyday items. Added to that, a tried and tested formula of marketing and product innovation helped sales, profits and dividends rise over the years.

Most of the headline acts are delivering solid performances, but RB has strayed from its well-trodden path more recently. 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.

Unfortunately, a litany of operational issues are still weighing on margins, and demand for MJN baby formula in China isn't flying. There's also increasing competition in the region.

There have been other problems too. 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 compensation claimants continues to rise.

There are some brighter spots though. The settlement for Reckitt's past sale of opioid addiction treatments has finally been put to bed. The $1.4bn price tag was higher than originally thought, but the group had already warned its original provision would likely need to be significantly increased. It means incoming CEO, Laxman Narasimhan, has one less thing to worry about.

We think near-term fortunes rely on MJN, and the group's ability to stabilise margins - which the group believes it will do by the end of this year. Other news that could move the dial includes if Narasimhan decides to split the business into two. We expect he will want to have his feet under the table for a little while before making any decisions, but investors will inevitably be watching this space.

The shares currently trade on 18.7 times expected earnings, a touch above the longer-term average, and offer a prospective yield of 2.7%.

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Half year results

Total half year net revenue was £6.2bn, a 1% underlying increase on last year. That reflects a 3% decline in volumes only being partially offset by a 4% in price/mix.

Adjusted operating profit declined 1% to £1.5bn as operating margins fell slightly to 23.6%, with Health margins particularly weak.

Within Health, the infant Child Nutrition business encountered some challenges in China and the group suffered weaker performances from brands including Dettol and Durex. That meant LFL sales dipped 1%, dropping net revenue to £3.8bn. A 1.2 percentage point fall in margins, from cost pressure and increased investments in capacity, saw adjusted operating profits fell 6% to £948m.

Hygiene Home adjusted net revenue was up 3% to £2.4bn, and with profitability improving, adjusted operating profit rose 11% to £527m. Brands such as Harpic performed well, and online shopping drove strong growth in the division.

Group free cash flow declined to £929m (2018: £954m), partly due to the poorer operational performance in Health. Net Debt was £10.5bn, which was down from £10.7bn last year, thanks to an increase of cash on the balance sheet and helpful foreign exchange trends.

The group expects to return to a 'normal level of growth' in the second half of the year.

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