ii view: Reckitt and a £2 billion strategic revamp

With underperforming sales and a net loss of over £3 billion, can Reckitt regain former glories?

Strategic review and full-year results to 31 December 2019

• Investing £2 billion over the next 3 years
• £5 billion writedown on its 2017 purchase of Mead Johnson
• Productivity savings of £1.3 billion over 3 years
• Net loss of £3.68 billion reported
• Adjusted earnings per share up 2.8% to £3.49
• Total 2019 dividend payment up 2.3% to 174.6p

Guidance

• Expect higher level like-for-like revenue growth than last year (2019: +0.8%)

Chief executive Laxman Narasimhan said:

"We ended 2019 broadly in line with our expectations for net revenue growth and adjusted operating profit from October, as our Hygiene business delivered another stable performance.  Health remained weak from a net revenue perspective, but consumption and market share trends are encouraging.

"We have started a journey of three phases: first stabilise and perform, then perform and build, and finally, outperform.  We will create a strong company which can consistently generate mid-single digit organic revenue growth, 7-9% earnings per share growth and strong cash conversion.

"We have a clear plan to invest £2 billion in our business over the next three years to make this happen.  Specifically, in 2020 we will increase investment behind our digital capability, in-market competitiveness and operational resilience, particularly in customer service, as well as innovations, as we align around our new organisation."

ii round-up:

A previously promised strategic review from the new Chief Executive dominated these latest results from health, hygiene and nutrition company Reckitt Benckiser (LSE:RB.). 

An investment of £2 billion is to be made over the next 3 years in order to return the company’s sales and earnings to their former glory, funded by a temporary margin reduction and productivity savings of £1.3 billion over each year.

An increased emphasis on its Chinese business will be made, while its current Home business will be integrated into the hygiene division. 

A £5 billion writedown of its 2017 purchase of infant formula maker Mead Johnson pushed full-year profits to a £3.68 billion net loss, with like-for-like sales up 0.8% for 2019, below the 3% growth made in 2018. 

Accompanying management outlook comments pointed to 2020 being a transitional year. Trading had enjoyed a strong start, aided by sales of Dettol in the wake of the coronavirus, although management was mindful of the uncertain environment ahead given its outbreak.

The share price rose by more than 1% in morning trading following an initial loss of over 3% and against the backdrop of further coronavirus losses for the FTSE 100 index. 

ii view:

A portfolio of health, hygiene and nutritional products should make Reckitt a relatively defensive and potentially recession hardened investment. 

Today’s strategic review lays the blame for its recent lagging performance at the door of executional and not structural issues. No businesses are being sold, with the company to centre around its existing three global categories. Required investment needed to enhance performance including a focus on its digital capability will be self-funded. 

For investors, an historic dividend yield of over 2.5% (not guaranteed) and covered twice by earnings, offers some attraction in the current ultra-low interest rate environment, while a forward price/earnings (PE) ratio below both the three and 10-year averages could now point to the emergence of value. But, with firm evidence of a performance recovery yet to be made, investors may prefer to take a ‘wait and see’ approach for now. 

Positives: 

• Diversity of product type and geographical location
• A relatively new CEO is looking to galvanise and provide renewed clarity of purpose

Negatives:

• Health sales fell 2.2% in the fourth quarter – accounts for 60% of group sales
• Financial litigation from South Korean consumers overhangs

The average rating of stock market analysts:

Strong hold