ii view: Reckitt Benckiser shares soar on confident outlook

First half (H1) and second quarter (Q2) results to 30 June

• H1 net revenues down 3.8% to £3.3 billion
• H1 operating profit down 10.7% to £1.49 billion
• Adjusted or core Q2 Like-for-Like (LFL) revenues up 5.3%
• Interim dividend up 5% to 84.4p per share
• New £1 billion share buyback programme
• Net debt up 4% from late December to £8.4 billion

Guidance:

• Now expects growth in full-year LFL core revenues of over 4%, up from a previous 3%-to-4%

Chief executive Kris Licht said:

“This is a strong first-half performance. We have taken a significant step to unlocking value with the announced divestment of Essential Home. Our new operating structure has sharpened our focus, delivering improved execution with continued market share gains and volume momentum. 

“We delivered excellent growth in Emerging Markets and navigated a challenging consumer environment in our Developed Markets. Our Fuel for Growth programme is ahead of plan, reducing fixed costs, fuelling brand investments and expanding our platform for sustained margin and earnings growth.”

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ii round-up:

Consumer goods company Reckitt Benckiser Group (LSE:RKT) today detailed early progress under management’s plan to concentrate on core, or so-called Powerbrands in its push to improve financial performance. 

Second-quarter like-for-like sales for core brands like Mucinex cold remedy, Gaviscon for heartburn and Durex condoms rose 5.3%, beating City forecasts for a gain of 3.4%. 

The news comes just days after Reckitt agreed to sell most of its Essential Home products business selling brands such as Airwick air fresheners and Cillit Bang cleaning products. Full-year like-for-like core sales are now expected to grow by more than 4%, up from management’s previous estimate of 3-4%.

Shares in the FTSE 100 company rose 10% in UK trading having come into these latest results down by more than a quarter over the last five years. The FTSE 100 is up close to 50% in that time. US consumer goods company Procter & Gamble Co (NYSE:PG) is up by a quarter. 

Total Reckitt revenues for the first half to late June fell 3.8% to £3.3 billion, driving a 10.7% reduction in operating profit to £1.49 billion. 

Share buybacks to the value of £0.5 billion during the first half are being followed by a new £1 billion programme over the next year. The interim dividend is up 5% from a year ago to 84.4p per share. 

Reckitt anticipates an eventual $2.2 billion return to shareholders and share consolidation following its 70% stake sale in the Essential Home products business for up to $4.8 billion. The sale is expected to complete by year-end. 

Broker UBS reiterated its ‘buy’ stance post the results. A third-quarter trading update is scheduled for 22 October. 

ii view:

Reckitt Benckiser was formed in 1999 via the merger of Reckitt Coleman and Dutch company Benckiser. The company flags the sale of 30 million of its products across its many geographical markets every day. Other designated Powerbrands include Nurofen, Strepsils and Veet. Group strategy aims to make Reckitt a more efficient, world-class consumer health and hygiene company, focused on a portfolio of high-growth, high-margin Powerbrands. 

For investors, total revenues and headline operating profits each fell during this latest period. Relatively easy sales comparatives over the next six months will become harder. The group’s diversity of products is being reduced, while pressured consumers may continue to seek cheaper own brand supermarket alternatives. 

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On the upside, investments in enhancing product superiority are ongoing. Emerging market sales rose almost 7% during the half-year. An estimated 25% discounted valuation to the broader European Union staples sector suggests the shares are not obviously expensive, while ongoing share buybacks and a forecast dividend yield of over 4% point to a focus on shareholder returns. 

For now, and while Reckitt remains a work in progress, a consensus analyst estimate of fair value above 5,800 per share implies room for modest upside from 5,558p currently.

Positives: 

• Diversity of product type and geographical location
• Focus on shareholder returns

Negatives:

• Uncertain economic outlook
• Many supermarket own brands now compete

The average rating of stock market analysts:

Buy