Interactive Investor

Don't write off reliable Reckitt Benckiser

19th October 2016 13:46

Harriet Mann from interactive investor

With the fatal South Korean disinfectant scandal, tough Russian market and sluggish take-up of Scholl footwear products, Reckitt Benckiser missed City forecasts in the third quarter.

It's proved a perfect excuse for shareholders to bank some stunning profits after a phenomenal 33% rally since February. But, with a track record of outperformance, the long-term prospects still look good.

Quarterly like-for-like sales growth was damaged by the South Korean disinfectant scandal and subsequent boycott of Reckitt products there, halving from 4% since the second quarter.

It rose just 2% to £2.6 billion as turnover from its Home and Portfolio brands both fell - Vanish and local laundry detergent make up a significant part of the South Korean portfolio.

Reckitt's humidifier sanitiser was linked to the deaths of 96 people between 2001 and 2011. It has set aside over £300 million in compensation and issued a formal apology in May, and warns that wider legal or governmental investigation or actions are possible.

Korea hit group like-for-like performance by around 1.5% in the quarter and developing markets by mid-single digits. At least, sales are up 4% in the year-to-date, a level management still thinks it can maintain for the rest of the year - the lower end of previous guidance.

The scandal has affected growth in developing markets, although strong momentum in India, China and other emerging markets underpinned a 7% increase to £788 million.

As part of its "long-term commitment to growth" in China, Reckitt has invested $50 million into the China Resources Pharmaceutical Group, representing less than 1% of the shares in issue when it lists on the Hong Kong Exchange later this month.

The weak consumer environment in Russia and disappointing launch of its new Scholl product also weighed on growth in its largest market, Europe and North America. Momentum in the American Durex franchise, Finish dishwasher detergent, and Move Free joint supplements helped offset this and sales were flat at £1.7 billion, nearly two thirds of net revenue.

Investigations ongoing

Reckitt is still being investigated by the US Department of Justice and the US Federal Trade Commission over its 2014 pharmaceuticals demerger to form Indivior.

One of the most actively traded blue-chip stocks on Interactive Investor Wednesday, the shares fell almost 4% Wednesday. A beacon of reliability, much like consumer products chum Unilever, Reckitt surged 18% after the European referendum to an all-time high of 7,786p.

But it takes blockbuster results to maintain a forward price/earnings (PE) ratio of around 24 times, even if the consumer group has been trading at more demanding valuations since the spin-off of its pharmaceutical division in 2014. And the share price has formed a bearish trendline over the past four months, now fast-approaching 7,066p support.

Barclays analyst Simon Hales expected challenges this quarter, but remains upbeat.

"With some short-term headwinds to OSG [organic sales growth] and the foreign exchange benefits captured in recent share price moves the stock may pause for breath," said the analyst before the results.

"However, with arguably the best-in-class management team and a track record of excellent OSG and margin delivery, any period of weakness may prove short-lived."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.