After reeling at the opening bell, shares in consumer products powerhouse Reckitt Benckiser (RB.) rise 21p to £70.56 in the face of further downgrades to its 2017 sales targets.

Reckitt is still recovering from a June cyber attack which disrupted production and caused a loss of sales, meaning net revenues fell in the third quarter, although the market is evidently excited by a dramatic corporate rejig to drive growth.

RECKITT’S Q3 MISS

Slough-based Reckitt Benckiser’s third quarter update reveals a 1% like-for-like sales decline, missing consensus estimates for 0.6% growth and disappointing for Shares, as we’ve just reintroduced the stock to our Great Ideas portfolio.

‘Q3 was a soft quarter as we experienced both the tail end of known issues, and the impact of a continuing challenging market environment,’ concedes CEO Rakesh Kapoor.

Besides the aftermath of the cyber attack, Reckitt’s poor performance reflects weak demand for its Scholl/Amopé footcare product. Sales in India were also flat, customer stock levels low heading into the quarter due to the Goods & Services Tax coming into force in July, with supplies subsequently delayed by the cyber attack.

Confidence rocked by the weak third quarter performance, the Durex, Dettol and Gaviscon brands owner has cut 2017 full year like-for-like sales guidance to flat from 2% growth at the half year stage.

‘Our underlying performance was in line with current market growth of around 2%,’ says Kapoor, also adding that his charge’s £13bn acquisition, US baby formula maker Mead Johnson Nutrition (MJN), ‘had a better quarter, in particular in Greater China’.

Reckitt Benckiser - OCT 17

COULD RECKITT DO THE SPLITS?

Undoubtedly the main ‘new’ news today is that Reckitt is reorganizing its operating structure into two distinct divisions. The new structure will take effect on 1 January 2018.

RB Health, circa 60% of revenue, will include Consumer Health brands such as Nurofen, Gaviscon and Strepsils, the Mead Johnson business and some Hygiene brands (Dettol, Veet and Clearasil), with Kapoor himself assuming direct responsibility for the division.

RB Hygiene Home, speaking for 40% of revenue, will include brands such as Finish, Cillit Bang and Air Wick.

As the consumer health interests are the faster-growing, higher-margin parts of the business, the market is wondering if innovation machine Reckitt might sell or demerge the RB Hygiene Home arm in order to focus on building RB Health organically and through further acquisitions.

Liberum Capital explains: ‘In our view, this new structure could be the prelude to a split of the business or a sale of RB Hygiene Home, particularly if an attractive asset such as Pfizer’s consumer health division becomes available.’

Liberum rates Reckitt Benckiser a ‘buy’ with an £87 target price.

‘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),’ thunders the brokerage.

In contrast, Investec Securities’ Eddy Hargreaves is a seller with a £64 price target.

‘We consider the risk to both earnings estimates and the multiple to be higher than average, while the possibility of a bid for Pfizer’s OTC business (which we value at $15-17.5bn) – while simultaneously working to stabilise both Mead and the core business – is unlikely to allay concerns, even if it were to be part-funded by a sale of Hygiene Home.’


Issue Date: 18 Oct 2017