ii view: optimistic Reckitt Benckiser predicts more of the same

A Covid lift in sales is helping the company to make revitalising investments. Can 2021 replicate 2020?

Full-year results to 31 December 2020

• Like-for-like sales up 11.8% to £13.9 billion
• eCommerce sales up a record 56%
• Adjusted earnings per share down 6% to 327p 
• Final dividend of 101.6p per share leaving the total annual payment unchanged at 174.6p per share
• Net debt down 17% to £8.95 billion

Guidance:

• Expects like-for-like sales growth between 0 to +2%
• Adjusted operating margin expected to remain broadly unchanged

Chief executive Laxman Narasimhan said:

“We have made a strong start to implementing our new strategy and proved that we can adapt and successfully respond to rapidly changing market conditions. Our portfolio is clearly resilient - with or without Covid-19 - and we are building a stronger business for the future.

"2020 was a turning point for RB. Our performance is strong, we are building capability, actively managing our portfolio and transforming our culture. We expect 2021 to be a year of further strategic progress and we remain confident that we will meet our medium-term targets."

ii round-up:

Hygiene and health product maker Reckitt Benckiser (LSE:RB.) expects like-for-like sales to grow by up to 2% over 2021 as a tailwind from the pandemic continues to buoy performance. 

Reckitt, whose hygiene brands include both Lysol and Finish, reported a near one-fifth jump in such sales to £5.8 billion in 2020. Like-for-like sales for its health division, whose brands take in both Gaviscon and Durex, jumped by 12% to £4.89 billion. 

But adjusted earnings per share for 2020 fell by 6% to 327p, hindered by the cost of ongoing investment under the relatively new chief executive’s performance improvement plan. 

Reckitt shares drifted marginally lower in UK afternoon trading, leaving them down around 5% over the last year. Domestos brand owner Unilever (LSE:ULVR) shares are down by just over 10% over the last year, while PZ Cussons (LSE:PZC) and McBride (LSE:MCB) are both up by more than a quarter. 

The adjusted operating margin at Reckitt is expected to remain broadly the same during 2021 at around 23.6%. During 2020, it invested a record £745 million in strengthening its customer service, building brand awareness and improving both its digital capabilities and environmental sustainability.

In tandem with the results, the Slough headquartered company also announced the sale of its Scholl footcare business and the acquisition of Biofreeze pain relief gel from Performance Health.

It has also begun a strategic review of its infant formula business in Greater China, which generates around 6% of group sales, with multiple options being explored. Nutritional product sales overall during 2020 remained little changed at £3.3 billion.  

Over the year, and utilising its strong hygiene brand portfolio, it also established a new professional services business, with customers including Hilton, Avis (NASDAQ:CAR) and Delta Air Lines (NYSE:DAL) all signing supply agreements. 

E-commerce sales grew by a record 56% and now account for around 12% of total revenues. Both Dettol and Lysol entered 41 new markets during 2020, with plans to enter a further 29 markets in 2021. Management expects around 80% of its customers to retain many of their new pandemic habits post the virus. 

ii view:

A portfolio of health, hygiene and nutritional products should make Reckitt a relatively defensive and potentially recession hardened investment. The latest pandemic windfall lifts the company at a time of change and comes in the wake of significant investments. Its previously outlined strategic review laid the blame for its previous lacklustre performance at the door of executional rather than structural issues. 

For investors, the self-funded cost of required investments is still yet to be fully swallowed. Despite management estimates, some shine could be removed from its sales performance going forward as vaccinations build and the virus retreats. That said, early evidence of management’s improvement push is robust. E-commerce sales have been impressive while around 70% of its categories either gained or held market share. A historic and estimated dividend yield at close to 3% (not guaranteed) is also not to be dismissed in an era of ultra-low interest rates. In all, while there is still progress to be made, Reckitt looks to be moving in the right direction in its quest to return to former glories. 

Positives: 

• Diversity of product type and geographical location
• The 2019 appointed CEO is looking to galvanise and provide renewed clarity of purpose

Negatives:

• Nutritional sales fell 2% on a reported basis
• Financial litigation from South Korean consumers overhangs

The average rating of stock market analysts:

Buy