Reckitt remains full of vitality

Consumer health and hygiene titan’s competitive advantage remains intact
Thursday 12 Oct 2017 Author: James Crux

Share price weakness at consumer health and hygiene giant Reckitt Benckiser (RB.) presents a not-to-be-missed buying opportunity for seekers of high-quality, defensive stocks.

Short-term issues currently weigh on sentiment towards the Dettol, Durex, Gaviscon and Cillit Bang brands owner, yet we’re staying positive on Reckitt for its superior innovation skills, globally-derived earnings and dependable cash flow.

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Ready for recovery

Sentiment towards the FTSE 100 manufacturer and distributor of household, toiletry and pharmaceutical products has soured amid downgrades caused by a weaker top-line performance.

Downward earnings revisions largely reflect disruption caused by a June cyber attack which meant orders ready to be shipped could not be sent. Some unwinding of sterling weakness against the US dollar has also impacted estimates, while investors are also nervous about the full financial impact from a humidifier scandal in South Korea, where consumers have boycotted Reckitt’s products.

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Marmite Mead deal

Reckitt’s transformational £13bn acquisition of US baby formula maker Mead Johnson Nutrition has also proved divisive. Bears point to headwinds faced in the US and China and Reckitt’s lack of experience in infant nutrition; bulls to Reckitt’s increased emphasis on higher margin Health & Hygiene categories and enlarged emerging markets exposure.

Those impatient with the pace of sales recovery at Reckitt are also factoring-in competition from local companies in emerging markets and the re-emergence of cheaper private label products, particularly in the US amid the rise of discounters and the online channel.

But we’re in agreement with Berenberg, which has reiterated (9 Oct) its ‘buy’ rating and £85 price target, which represents 21% upside from current levels for a business with high margins, excellent cash generation, strong returns on invested capital and a robust balance sheet.

Acknowledging soft recent growth trends, Berenberg doesn’t believe Reckitt’s competitive advantage in innovation and health has eroded and expects ‘the top line to accelerate back to a sector premium’, also flagging up the £48.8bn cap’s proven ability to ‘premiumise a category’.

Shares also welcomes 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 $4.2bn.

Divestiture proceeds will be used to pay down debt arising from the Mead Johnson takeover, Berenberg forecasting a reduction from a 2017 year-end £9.5bn to £8.1bn in 2018, then £6.66bn by the end of 2019. Even in the face of current headwinds, Berenberg forecasts improved earnings per share of £3.04 (2016: £2.24) and a £1.86 dividend (2016: £1.53) this year, building to £3.54 and £2.16 in 2018 respectively, a testament to Reckitt’s diversity and resilience.

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