Reckitt Benckiser recovery gathers steam after grim 2024
Three major sell-offs this year sent Reckitt shares to a decade low, but investors are backing management to reverse the decline. Now, there’s speculation a big deal is on the cards.
18th September 2024 15:26
by Graeme Evans from interactive investor
A potential £6 billion price tag for homecare brands including Air Wick, Calgon and Cillit Bang today fired up interest in the fledgling recovery for Reckitt Benckiser Group (LSE:RKT) shares.
Having suffered a hat-trick of setbacks between February and July, the shares have since rallied by 12% as the City warms to chief executive Kris Licht’s plan for a “sharper, simpler Reckitt”.
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His strategy involves rebuilding Reckitt around the company’s leading high-growth consumer health and hygiene brands, which include Harpic, Durex and Gaviscon.
This week’s speculation over developments in this transformation plan, including the potential disposal of certain home-care assets and the Mead Johnson business, today lifted shares by another 67p to leave Reckitt at its highest since March at 4,677p.
That’s still some way short of the 5,872p seen before February’s worse than expected fourth-quarter results and then the loss of a court case filed against the Mead Johnson infant formula business in the United States.
Shares also reversed in July after a mixed set of interim results accompanied Licht’s strategic plan, leaving Reckitt valuation at a decade low and approximate 35% discount to peers in the European food, home and personal sector.
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While acknowledging that Reckitt's transformation plan comes with several areas of risks and uncertainties, UBS said today that this valuation gap looked increasingly unwarranted.
The Swiss bank, which continues to have a price target of 7,170p, argues that the remaining core businesses should have a compelling and “clearly top-quartile” earnings growth model.
This reflects the above-industry delivery of like-for-like sales growth of 7% between 2018 and 2023, the move towards a simpler and more agile structure and an elevated gross and operating margin well ahead of US peers.
It adds that an ongoing cost optimisation plan should yield £450 million in savings over the next 3.5 years and allow higher investment.
According to yesterday’s report by Bloomberg, the Essential Home operations could be valued at £6 billion amid interest from financial investors as well as some consumer companies. A formal sale process is likely to kick off within months and be completed in 2025.
Based on UBS estimates, such a price tag implies a valuation of 3.3 times sales and 12 times earnings compared with 2.8 times and 10 times respectively for the wider group.
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The Bloomberg report also said that Reckitt is considering options for Mead Johnson, having bought the US business in a 2017 deal that cost $17.9 billion including debt.
UBS said a potential separation of Mead Johnson would come as a significant relief to the market owing to the business's litigation challenges.
Together, the potential disposals represent almost one-third of last year’s revenues - split 13% for the portfolio of home-care brands and 16% for Mead Johnson.
Management has pledged to continue paying a progressive dividend and to return surplus cash to shareholders, including proceeds from future transactions.
The company, which is next due to update investors on 23 October, last week paid shareholders 80.4p a share after increasing the interim dividend award by 5%.
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