Interactive Investor

ii view: Reckitt Benckiser cleans up with disinfectants portfolio

28th July 2020 11:52

Keith Bowman from interactive investor

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Could Covid be the drink needed to help this health and hygiene giant swallow significant investment? 

First-half results to 30 June 2020

  • Net revenue up 10.8% to £6.91 billion
  • Adjusted earnings per share up 14.5% to 166.5p 
  • Interim dividend unchanged at 73p per share
  • Net debt of £10.2 billion

Guidance:

  • Raising 2020 sales growth estimate
  • Lowering 2021 profit margin estimate

Chief executive Laxman Narasimhan said:

"The world has changed beyond recognition in 2020. Covid-19 is likely to be with us for the foreseeable future and, as a society, we are embedding new hygiene practices to protect our way of life.

“Our Hygiene and base Health businesses have both performed well, with strong volume growth in challenging circumstances. At the same time, our infant and child nutrition business has delivered important operational and executional improvements, although focus remains on delivering revenue growth through innovation and navigating headwinds such as Hong Kong. 

“Our strategy to rejuvenate sustainable growth at RB is unchanged and we have made good progress in the first six months of the year, albeit there is still a lot to do. Our strong outperformance will allow us to expand our plan to make incremental investments to capture new growth opportunities for the near- and long-term. While uncertainties remain for the second-half of the year, on both the public health and economic fronts, we have increased confidence in the successful delivery of our medium term goals."

ii round-up:

Hygiene and health product manufacturer Reckitt Benckiser (LSE:RB.) today reported sales and earnings that beat City forecasts, buoyed by demand for disinfectant brands such as Dettol and Lysol during the Covid-19 pandemic. 

But plans to use its Covid-19 windfall to enlarge a previously announced £2 billion investment plan to £2.2 billion, and further spread the cost into next year, overshadowed 2021 estimates.

Reckitt shares fell by 1% in early UK trading having risen by nearly a third since the UK went into lockdown in late March. Domestos brand owner Unilever (LSE:ULVR) shares are up by nearly a fifth since late March.

Second-quarter hygiene sales at Reckitt rose by nearly a fifth. Health product sales including brands such as Mucinex, Lemsip and Nurofen rose by 5%. 

Utilising its strong hygiene brand portfolio, if has also established a new professional services business. Since March the unit has signed new agreements to supply such customers as Hilton, Avis and Delta Airlines. 

Earlier in the year, and in tandem with its 2019 full-year results, the relatively new chief executive announced a £2 billion investment plan to return the company’s sales and earnings to their former glory, funded by a temporary margin reduction and productivity savings. 

Over the course of 2019, Reckitt shares rose by less than 2% compared to a gain of 12% for the wider FTSE 100 and 25% for the FTSE 250. 

Plans to expand and grow online sales have started well. Using channels such as Amazon (NASDAQ:AMZN), ecommerce sales grew by 60% to over $1.5 billion in the half year and now account for over 10% of group revenues. 

ii view:

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

This latest update has seen it benefiting from the Covid pandemic. Double-digit sales growth exceeded the single-digit estimate management previously provided. The pandemic windfall lifts the company at a time of change and comes in the wake of significant planned investment. Its previously outlined strategic review laid the blame for its prior lagging performance at the door of execution and not structural issues. 

For investors, the self-funded cost of required investment is still yet to be largely swallowed. But aided by the pandemic, the early evidence is favourable. Required investment needed to enhance online sales already looks to be bearing fruit. An historic and estimated dividend yield of over 2% also offers attraction against a backdrop of suspended dividends from many other companies, and as investors wait for required investment to be implemented. In all, Reckitt appears to be justifying its position as a firm favourite in investor portfolios.

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 2019 - accounts for 60% of group sales
  • Financial litigation from South Korean consumers overhangs

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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