Reckitt Benckiser: a FTSE 100 stock at big discount to peers

A strategy for reviving Reckitt Benckiser Group (LSE:RKT) shares is to focus on high-growth brands including Harpic, Durex and Strepsils and unwind the company’s biggest-ever acquisition.

Chief executive Kris Licht’s plan for a “sharper, simpler Reckitt” follows a dreadful first half of 2024 for shareholders, down 21% as the sixth-worst performer in the current FTSE 100.

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The reverse followed February’s worse than expected fourth-quarter results and the loss of a court case filed against its Mead Johnson infant formula business in the United States.

Reckitt’s plight has left its valuation at a decade low and with a multiple of 12 times forecast 2025 earnings, a 35% discount to peers in the European food, home and personal sector.

The shares, which have been targeted by activist investors and are backed by UBS analysts with a price target of 7,170p, trade with a dividend yield of 5.5%.

A mixed set of interim results meant its stock market fortunes failed to revive today despite the strategic shift, which alongside a review of the options for the Mead Johnson business includes plans to divest brands including Air Wick, Calgon and Cillit Bang.

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Together, the potential disposals represent almost one-third of last year’s revenues - split 13% for the portfolio of homecare brands and 16% for Mead Johnson.

Reckitt bought the US business in 2017, a deal that cost $17.9 billion including debt and which it billed as a significant step forward in its journey as a global leader in consumer health.

Today, Licht said the business and its market-leading brands of Enfamil and Nutramigen are non-core and that Reckitt will consider ways to maximise shareholder value.

It sold the Chinese division in 2021, with one analyst quoted by the Financial Times today putting the value of the business at £5 billion before any discount for litigation risk.

Licht, who took over as group chief executive in October, will instead seek to rebuild the Reckitt business around its leading consumer health and hygiene brands.

Over the last five years this portfolio has generated a 7% net revenue compound annual growth culminating in last year’s margin of 61%. They also include Nurofen, Finish and Veet.

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Reckitt said: “These high-growth, high margin power brands are beloved by consumers and hold leading market shares in categories with significant headroom for long-term growth.”

The company said it would continue to pay a progressive dividend and return surplus cash to shareholders, including proceeds from future transactions.

Alongside today’s strategy update, Reckitt reported half-year results showing a 4.9% decline in operating profit to £1.68 billion.

A 6.8% fall in earnings per share to 161.3p was better-than-expected but a second quarter volume decline of 2.2% was worse than the 1.5% forecast by analysts. In addition, the impact of a US tornado on the warehouse operations of its Nutrition business means full-year like-for-like revenues growth is likely to be 1-3% rather than the previous 2-4% range.

The company announced a new £1 billion buyback plan and increased the half-year dividend for payment on 13 September by 5% to 80.4p a share.