Reckitt Benckiser and McColl’s Retail

Monday, February 18, 2019 - 09:49

“The London market failed to sustain last week’s positive momentum with the FTSE 100 falling 0.2% on Monday amid weakness in pharma, tobacco and insurance stocks. “Other parts of the world fared better including Japan’s Nikkei 225 which climbed 1.8%, riding a wave that spread across other parts of Asia thanks to growing optimism over the US/China trade talks,” says Russ Mould, Investment Director at AJ Bell.

Reckitt Benckiser

“What kind of legacy will Reckitt Benckiser chief executive Rakesh Kapoor leave when he retires at the end of this year?

“Kapoor has eight years under his belt as chief executive and more than 30 years at the company in total, so the question of legacy is likely to be important to him. In that context, a better-than-expected performance in the last three months of 2018 will provide some cheer.

“Particularly as both parts of the business, Health and Hygiene Home, contributed to the outperformance. The full separation of the businesses into two standalone units under the same parent group is expected to complete in 2020.

“Health includes the integrated Mead Johnson infant nutrition business whose $18bn capture stretched Reckitt’s balance sheet and raised questions about Kapoor’s handling of the business. Missing out in an auction of Pfizer’s consumer health assets last year was also seen as a blow.

“Gross margins fell in 2018 thanks to increased raw material costs and pricing pressure but the company managed to take out some costs to balance this out.

“While Kapoor’s final 12 months in charge aren’t likely to be knock-out they should be steady with margins held flat and growth of between 3% and 4%.

“Questions for Kapoor’s replacement are likely to include whether to prioritise revenue growth over profitability and whether separating out Health and Hygiene Home should be the precursor to a more formal and permanent split through a sale or spin-off.”

McColl’s Retail

“The convenience store operator will be glad that its 2018 results are finally published as it will allow the business to move on from what was a terrible year.

“Supply chain disruption caused major problems and led to a large decline in profit. While management are relatively upbeat about the outlook, it won’t be an easy ride given how competitive the grocery sector remains.

McColl’s looks to be doing the right thing. Its net debt is coming down rapidly, it is investing in its business to keep stores looking fresh, and it is getting rid of underperforming outlets.

“Furthermore, it is boosting the number of stores offering hot food and coffee and has added Subway counters to 23 sites.

“Unfortunately many of its rivals are also strengthening their proposition, meaning that 2019 is not going to be a breeze for McColl’s. It needs to accelerate a shift into higher margin products to give its earnings some sort of cushion if new problems emerge. At the moment its operating profit margins are wafer-thin, leaving no room for error.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.