ii view: hygiene up, health down at Reckitt

Investment spending, the pandemic and rising input costs are all at play. We assess prospects. 

First-quarter trading update

• Like-for-like (LFL) net revenue up 4.1%
• Hygiene LFL growth of +28.5% - Health LFL decline of -13% - Nutrition LFL decline of -7.4%

Guidance

• Outlook for 2021 is unchanged and we remain on track to achieve our medium-term goals

Chief executive Laxman Narasimhan said:

"2021 has started well with like-for-like net revenue growth of +4.1% in line with our expectations. This brings two-year growth to over 17% as we lap the pantry loading of March 2020.

“We see continued strong demand for our brands, better execution, and the benefits of our recent investments feeding through in the form of more focused innovation, increased capacity, and better customer service. There is still much to do, and the actions we are taking make Reckitt a stronger, more competitive, business with each day. “

ii round-up:

Hygiene and health product maker Reckitt Benckiser (LSE:RKT) today reported mixed sales for its three divisions. 

Although sales of hygiene products such as Lysol and Dettol grew by 28% under the pandemic, sales for its cold and flu items at its health division fell by 13% given ongoing social distancing. 

Reckitt shares fell by more than 2% in UK trading, leaving them little changed over the last year. Shares for Domestos maker Unilever (LSE:ULVR) are also barely changed. 

Total quarterly like-for-like sales growth of 4.1% exceeded City forecasts for nearer to 3%, with management leaving its previous estimate for revenue growth of between flat to +2% over 2021 unchanged. 

But Hygiene sales showed some signs of slowing in markets that had re-opening from lockdowns. Dettol sales fell in China. Volumes for the Health business retreated by 14%. Sales for its baby nutrition business remain hindered by the Hong Kong border closure, hitting sales into Greater China. 

During 2020, Reckitt invested a record £745 million in strengthening its customer service, building brand awareness and improving both its digital capabilities and environmental sustainability.

eCommerce sales rose by nearly a quarter in the period, aided by the company’s investment programme, and accounted for 13% of total company net revenues. 

In March, the company rebranded to just Reckitt. First-half results are scheduled for 27 July. 

ii view:

A portfolio of health, hygiene and nutritional products should make Reckitt a relatively defensive investment. A previously outlined strategic review laid the blame for its prior lagging performance at the door of executional and not structural issues. Now the push from a global pandemic has helped lift it at a time when it has been swallowing the cost of significant investments. 

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 basement cheap. 

But evidence of management’s improvement push continue to be seen. Ecommerce sales are expanding, and its product portfolio rejigged, such as its previous sale of its Scholl footcare business and the acquisition of Biofreeze pain relief gel. A historic and estimated dividend yield at close to 3% (not guaranteed) is also not to be dismissed in an era of ultra-low interest rates. In all, while there is still progress to be made, Reckitt still appears to be trending in the right direction in its quest to return to former glories.

Positives: 

• Diversity of product type and geographical location
• The 2019 appointed CEO is looking to galvanise and provide renewed clarity of purpose

Negatives:

• Nutritional sales fell 7.4% on a reported basis
• Input costs are rising

The average rating of stock market analysts:

Buy