Reckitt Benckiser is back in the City’s good graces as investors mopped up news of significant progress in a long-awaited turnaround at the Dettol to Durex multinational.
Shares in the FTSE 100 heavyweight surged by more than 11% to as high as 5,617p yesterday following half-year results before closing at 5,558p, adding almost £4bn to the market cap.
Reckitt upgraded annual growth projections from 3% to 4% for its core stable of power brands following a drive to simplify the group’s operations over the past year.
It follows a $4.8bn (£3.6bn) deal to offload the unwanted Essential Home business, including the likes of Cillit Bang, Calgon and Air Wick, to PE firm Advent International announced last week.
Analysts were initially underwhelmed, and market reaction muted, on Friday as Reckitt unveiled the news, with David Hayes at Jefferies calling the divestment “disappointing”.
Hayes bemoaned the “lack of a clean exit” given Reckitt would retain a 30% stake in the business and highlighted the price tag as being £1bn lower than hoped for by the City.
But sentiment changed this week as CEO Kris Licht said the journey to “fundamentally reshape Reckitt into a more efficient, world-class health and hygiene company is well underway”.
The core portfolio increased like-for-like net revenues by 4.2% to £5bn in the six months to 30 June, while the offloaded Essential Home business registered a 6.5% decline to £911m and the Mead Johnson baby formula business fell 3.3% to £1.1bn.
There was a big beat to market expectations for Q2 volumes, which came in at 5.3% higher versus consensus of 3.4% – with a strong contribution from emerging markets.
Alongside the beat and uplift to guidance, Reckitt revealed a new £1bn buyback program.
Callum Elliott of Bernstein expected the stock to react favourably to the news. “This big step-up in brand investment is likely to be supportive of improving market shares and organic growth over the coming 12 months and should continue to drive increasing confidence in the Reckitt turnaround,” he said.
AJ Bell investment director Russ Mould added the markets finally believed in Licht’s recovery plan after the CEO “donned his marigolds and got out the mop and bucket in an attempt to clean up the mess at consumer goods giant.”
“The merits of focusing on its ‘power brands’ is evident in the numbers, with them delivering meaningful growth at a strong margin while the essential home component is finding life harder going,” he said.
“Reckitt lauds the benefits of its more focused approach, which means it is pitching the brands that really matter more successfully and thereby achieving market share gains.
“The big question for management is what happens with the Mead Johnson infant nutrition business, with that question only likely to increase in volume given the weak performance. The litigation issues which continue to loom are not helpful in terms of achieving an exit.
“Reckitt’s significantly better performance in emerging markets is telling. In the developed world the company faces increasing pressure from unbranded alternatives. However, in developing countries these alternatives do not exist in any meaningful sense and therefore the company’s trusted brands are in demand with those consumers who can afford them.”
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