ii view: Reckitt sells its Chinese infant nutrition business

This consumer goods brand name giant continues to rejig its business portfolio. We assess prospects. 

Business disposal

Chief executive Laxman Narasimhan said:

"Today's announcement marks another step in our strategy to rejuvenate growth and create long term value.  As part of this journey, we are actively, and decisively, managing our portfolio.

“After a thorough review of Infant Formula and Child Nutrition China, we have found an excellent home for the business under the ownership of Primavera. We remain committed to China with our Hygiene, Health and VMS portfolios.  China is Durex's largest market and growing strongly and it is an important market for Dettol, Finish and our Vitamins, Minerals and Supplements (VMS) brands with significant potential for future expansion.”

ii round-up:

Hygiene and health product maker Reckitt Benckiser (LSE:RKT) today announced the sale of its Infant Formula and Child Nutrition business in China to investment firm Primavera Capital Group for $2.2 billion. 

Reckitt will retain an 8% shareholding in the Chinese business and will continue to operate its nutrition and adult vitamins business across other parts of the world such as North and South America and Asia. 

Reckitt shares were little changed in UK trading having gained by just over 10% since pandemic induced market lows back in March 2020. Shares for rival nutrition business Danone (EURONEXT:BN) are by around 6% over the same time. 

After costs and taxes Reckitt expects to receive net cash proceeds of $1.3 billion. The sale follows a comprehensive strategic review of its Chinese infant nutrition business commenced back in February.

Broker Morgan Stanley estimates that the sale will reduce full-year 2022 adjusted earnings per share by around 1% to 2% but improve the overall profit margin going forward. For the financial year to the end of December 2020, the China business generated net revenue of £861 million and operating profit of £85 million compared to overall sales of nearly $14 billion and operating profit of over $2 billion. 

Lower birth rates and rising national champions in China have put pressure on the infant milk formula businesses of multinational companies including both Reckitt and Danone according to Morgan Stanley. 

As a result of the sale, Reckitt expects to incur a net loss of around £2.5 billion, mainly down to the re-measurement of goodwill and intangible assets for the business.

Reckitt’s second quarter and first half results are scheduled for 27 July. 

ii view:

Reckitt operates through the three divisions of hygiene, health, and nutrition. Its many brands include Air Wick, Calgon, Cillit Bang, Clearasil, Dettol, Durex, Finish, Gaviscon, Harpic, Lysol, Nurofen, Strepsils, Vanish and Veet. Every day, more than 20 million Reckitt products are bought globally.

Following the sale of its Chinese nutrition business, Reckitt remains among market leaders in infant nutrition across other geographical regions, with a vitamins, minerals and supplements portfolio which also includes an adult nutrition business.

For investors, planned investments and increasing input costs are expected to pressure profit margins over 2021 compared to 2020. An estimated price earnings ratio above the three and 10-year averages also suggests that the shares are not obviously cheap. 

But evidence of management’s improvement push continues to be seen. This latest sale arguably removes it from a challenged business and leaves it more focused on areas of growth. Ecommerce sales are expanding and a historic and estimated dividend yield of over 2.5% (not guaranteed) is also not to be dismissed in an era of ultra-low interest rates. In all, and while challenges continue, Reckitt looks to be trending in the right direction with long-term investor support still deserved. 

Positives: 

• Diversity of product type and geographical location
• Business portfolio being rejigged under the 2019 appointed CEO

Negatives:

• Cold & flu related sales hit by pandemic lockdowns
• Input costs are rising

The average rating of stock market analysts:

Buy