ii view: Reckitt Benckiser shares rally after sales upgrade

Lagging the FTSE 100 index year-to-date, but with sales beating forecasts. We assess prospects. 

Third-quarter results to 30 September 2021

• Like-for-like (LFL) net revenue growth of 3.3%

Guidance:

• Expects full-year net revenue growth of between 1% to 3%, up from a previous 0 to 2%
• Maintaining its full-year profit margin estimate

Chief executive Laxman Narasimhan said:

“In September, we reiterated the building blocks which will see Reckitt return to mid-single digit revenue growth and mid 20’s margins. There is more to be done, but today’s results are
testament to our progress.

“Nine of our ten largest brands are up double-digits on a two-year basis. We remain confident in our medium-term outlook.”

ii round-up:

Hygiene, health, and nutrition group Reckitt Benckiser (LSE:RKT) continues to progress in its journey to recapture former growth rates. 

It reported broad-based like-for-like revenue growth both in terms of product and geographical region, with management’s estimate for full-year net revenue growth rising to between +1% to +3% from a previous 0 to +2%. 

Shares for the owner of brands including Lysol, Cillit Bang, Dettol and Finish rose by more than 5% in UK trading. That leaves them down by around 11% year-to-date, similar to shares of Domestos maker Unilever (LSE:ULVR) and compared to a gain of over 12% for the wider FTSE 100 index. 

Product price increases have helped battle rising input costs with Reckitt’s ongoing productivity improvement programme helping maintain full-year profit margin guidance. 

Activity in relation to its business portfolio has continued this year, with the sale of both its Chinese Infant Formula and Child Nutrition business and foot care provider Scholl, along with the acquisition of pain relief brand Biofreeze. 

Nutrition product sales such as vitamins led the way during this quarter, rising by 3.8% on a like-for-like basis to £640 million. Health product revenues followed, growing by 3.6% to £1.19 billion, with hygiene sales up by 2.9% to £1.45 billion.  

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 and Vanish. Every day, more than 20 million Reckitt products are bought globally.

For investors, the problem for Reckitt and its competitors is how rising costs are passed onto customers amid concerns about pressure on profit margins. That’s unlikely to go away while inflation continues to rise faster than expected. A previous push to invest in areas of growth having lost its former momentum, also offers cost headwinds, while the initial hygiene boost from the pandemic makes for tough comparatives.  

But these latest quarterly figures offer firm reassurance. Sales growth is ahead of analyst forecasts, ecommerce revenues are up by 23% and potential for a pick-up in its cold and flu remedies persists as Covid restrictions ease. A historic and estimated dividend yield of around 3% (not guaranteed) is also not derisory in an era of ultra-low interest rates. In all and despite challenges, growing 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:

• Rising input costs
• Hygiene sales battling tough pandemic comparatives

The average rating of stock market analysts:

Buy