ii view: market underwhelmed by Reckitt's Q3 update

Pushing an improvement programme and with a dividend yield of 3%. Buy, sell or hold?

Trading update

ii round-up:

Hygiene and health product maker Reckitt Benckiser (LSE:RKT) today flagged trading which has remained in line with its expectations since first-half results published late July. 

The owner of brands including Cillit Bang, Dettol and Finish is confident in delivering full-year 2021 like-for-like net revenue growth of between 0 and 2%. The adjusted operating profit margin is expected to come in at between 22.7% and 23.2%.

Reckitt shares drifted marginally lower in UK trading, having changed little from pandemic induced market lows in March 2020. Shares for Domestos maker Unilever (LSE:ULVR), which boassts the same defensive qualities, are also barely changed since March 2020 lows.  

First-half results saw Reckitt report some slowing in the use of its hygiene cleaning products as the peak of the pandemic had appeared to pass. That said, overall demand in the disinfectant category remained significantly higher than pre-Covid levels. Its Lysol product is now present in 22 million more households globally now than in 2019. 

Within its health product category, broker Morgan Stanley pointed to the potential for a pick-up in Reckitt's cold and flu remedies given a return to more normal living following earlier population lockdowns. 

Full-year guidance now excludes trading from its Infant Formula and Child Nutrition business in China, for which a $2.2 billion (£1.6 billion) sale completed on 9 September. Lower birth rates and rising national champions in China had put pressure on the infant milk formula businesses of multinational companies, including both Reckitt and Danone.

ii view:

Reckitt operates through the three divisions of hygiene, health, and nutrition. Its many brands include Air Wick, Calgon, Clearasil, Durex, Gaviscon, Harpic, Lysol, Nurofen, Strepsils, Vanish and Veet. Every day, more than 20 million Reckitt products are bought globally.

For investors, continued investments and increasing input costs are expected to pressure profit margins over the current financial year. Estimated price/earnings and price to net asset values above their three-year averages also suggest the shares are not obviously cheap. 

But his latest update does offer some reassurance. Evidence of management’s improvement push has been coming through, with the sale of its Chinese infant nutrition business adding to management’s push for change. Ecommerce sales have been growing and a historic and estimated dividend yield of around 3% (not guaranteed) is not derisory in an era of ultra-low interest rates. In all, and while challenges remain, optimistic signs of improvement arguably underpin long-term investor support.

Positives: 

• Diversity of product type and geographical location
• Business portfolio being rejigged under the 2019 appointed CEO

Negatives:

• Cold & flu related sales hit by pandemic lockdowns
• Input costs are rising

The average rating of stock market analysts:

Buy