A pull back at consumer health and hygiene powerhouse Reckitt Benckiser (RB.) is a buying opportunity. The Cillit Bang, Veet and Vanish brands owner is a so-called ‘expensive defensive’ but its globally-derived earnings, dependable cash flow and progressive dividend should remain highly prized if markets turn bearish.

GROWTH GUIDANCE DOWNGRADES

Slough-based Reckitt recently cut (6 Jul) its full year like-for-like sales growth guidance from 3% to 2%, blaming disruption from June’s Petya cyber-attack and a drag from India’s new Goods and Services Tax (GST). The £55.2bn cap’s subsequent and messy first half results (24 Jul) revealed a 2% second quarter like-for-like sales drop, reflecting the above factors as well as a failed Scholl innovation and the tragic humidifier sanitiser issue in South Korea, where one of Reckitt’s humidifier disinfectants was linked to a number of deaths.

First half operating profit still rose 16% to £1.19bn, ahead of consensus of £1.181bn and developing markets like-for-like sales improved 2% driven by China and Africa. In addition, Reckitt Benckiser hiked the half year dividend 14% to 66.6p, demonstrating management’s confidence in future prospects.

INNOVATION MACHINE

CEO Rakesh Kapoor concedes Reckitt is encountering tough market conditions, yet he expects to see a ‘return to growth progressively over the second half of the year’. Growth should pick up as the innovation machine launches a wave of new products, ranging from a Scholl value priced electronic foot file to Probiotic dark chocolates and Reckitt’s ‘best yet’ Lysol disinfecting wipes, while emerging markets should continue to drive the business, especially once the impact of the Indian sales tax recedes.

Shares sees considerable merit in the sale (19 Jul) of Reckitt’s food business, including the French’s, Frank’s RedHot and Cattlemen’s brands, to US spices giant McCormick for a princely $4.2bn. The sale will be used to pay down some of the debt arising from the transformational £13bn acquisition (15 Jun) of US baby formula maker Mead Johnson Nutrition.

Liberum Capital reiterates its ‘buy’ rating and £81.50 price target, writing: ‘Reckitt’s strategic focus on faster growing, higher margin Health and Hygiene categories, coupled with strong execution, powers top quartile 4-5% organic sales growth in the medium-term (ex-Mead Johnson). The Mead deal increases RB’s focus on Health & Hygiene (80% of group net revenue post deal) and emerging markets (40% of group net revenues).’

The valuation is punchy, Reckitt Benckiser swapping hands for 27.1 times Liberum’s 285p 2017 earnings forecast. Yet we think investors prepared to pay up for quality and look past short-term issues should buy Reckitt at £77.14. 

‹ Previous2017-07-27Next ›