ii view: Reckitt Benckiser shares fall more than 5%

Reckitt misses on sales and lowers full-year guidance. Has the company caught a cold?

Third-quarter trading update

• Overall like-for-like (LFL) sales up 1.6% 
• Health LFL sales down 0.3%
• Home Hygiene LFL up 4.5%

Guidance

• Full year 2019 net revenue growth target reduced to between 0 and 2% (previously +2 to 3%) 
• Full year 2019 adjusted operating margins expected to see a modest decline (previously flat)

Chief executive Laxman Narasimhan said:

"RB's performance in Q3 was disappointing.  We delivered another quarter of consistent growth in Hygiene Home.  Our Health business, despite good market growth and stable consumer offtake, delivered a weak net revenue performance.  This was primarily due to issues in the US and China. In the US, we saw more cautious retailer seasonal purchasing patterns.  In China, Infant Formula and Child Nutrition (IFCN) continues to face challenging market conditions. 

This performance is a reflection of an extended period of significant change and disruption in the company.  I am prioritising execution and operational performance as a matter of urgency.  I have made it clear within the organisation that any activities that detract focus and attention from improving our operational performance, be paused.  

I have lowered our revenue outlook for the full year 2019. I am confident we can restore RB to the levels of performance that it is capable of achieving, and build a purpose-driven, responsible company. I firmly believe that we have significant potential, with an outstanding set of brands in structural growth categories.  I look forward to providing a more detailed update on the business, and our plans to restore long-term sustainable performance, in February with our FY19 results."

ii round-up:

Health and hygiene company Reckitt Benckiser Group (LSE:RB.) reported sales below analyst forecasts and lowered key full year revenue and profit margin estimates. 

The share price fell by more than 5% in early UK stock market trading. 

Although home Hygiene sales for products in its range such as Finish and Vanish grew by 4.5%, Health sales for brands including Nurofen and Strepsils fell by 0.3%. As such, an overall like-for-like sales gain of 1.6% missed the consensus analyst estimate of up 3.2%.

Difficulties in both the US, accounting for a quarter of last year’s sales, and China, generating around a tenth, weighed on performance. US retailers attempting to better manage their stock of flu products following last year’s relatively mild season and lower Chinese infant nutrition sales impacted by declining birth rates and an increasingly competitive market place underlay the hit to health sales. 

Management moved to prioritise execution and operational performance, pausing all other initiatives while promising a more detailed update on recovery plans as of February 2020’s full year results. 

ii view:

The sale of its remaining food business back in mid-2017 marked the foundation of the company as it is today. A portfolio of health and hygiene products gives the company a defensive tag, with its goods potentially proving relatively recession proof. 

However, todays sales miss and lowering of key full year metrics in the wake of disappointing half year results raises the question as to whether challenges at the company are more than temporary. 

Form an investment prospective, a forward dividend yield of 3% (not guaranteed) and covered twice by earnings, offers attraction in the current ultra-low interest rate environment, while a forward price earnings ratio (PE) below both the 3- and 10-year averages could now point to the emergence of value. But with challenges at Reckitt now reoccurring, investor caution is clearly warranted.  

Positives: 

• Hygiene division reported broad-based growth across brands and geographies
• Reduced uncertainty following a settlement with US authorities regarding the mis-selling of opioids
• A relatively new CEO may galvanise and provide renewed clarity of purpose

Negatives:

• Disappointing Health sales – division generates two thirds of group revenue
• Health business subject to swings in cold and flu outbreaks 
• Financial litigation from South Korean consumers overhangs

The average rating of stock market analysts:

Strong hold