Reckitt Benckiser: Buy or sell?

Reckitt Benckiser (RB.) is laying down the foundations for another big portfolio shake-up, as it attempts to draw a line under the cyber-attack in June and India’s implementation of a goods and service tax that continues to impact on sales.

The consumer goods behemoth says it will create two separate business units – RB Health and RB Hygiene Home – from 1 January 2018 in order to provide it “with a platform for growth and outperformance”.

But analysts tell us it could lead to a split of the business or the eventual sale of the Cillit Bang and Harpic Hygiene Home division. Reckitt, which has already flogged its food business, has recently been linked with a bid for US pharma Pfizer's (PFE) consumer health division.

Liberum analyst Robert Waldschmidt describes the business as “an attractive asset”, but Investec’s Eddy Hargreaves says any bid is unlikely to allay his concerns about part-structural weakness in the Health over-the-counter market.

The re-structure comes after the firm missed analyst expectations for third-quarter like-for-like revenue growth, thanks to a big hit from the so-called “NotPetya” ransomware attack in the summer. Revenues fell 1% like-for-like to £3.2 billion, against consensus forecasts of a 0.6% increase.

It’s why Reckitt revised full-year sales expectations down for a second time this year. It now expects like-for-like net revenue growth for its base business to be flat in 2017, down from 3% growth before the cyber-attack.

Baby formula maker Mead Johnson, bought by Reckitt for $18 billion (£13.7 billion) in June, surprised on the upside, growing the top line by 1% versus forecasts of -1% thanks to a return to growth in China and some customer stocking in the US. Full-year guidance for Mead is unchanged at -2 to flat like-for-like growth.

RB Health, to be headed up by chief executive Rakesh Kapoor, will account for 60% of revenues and include Reckitt’s Durex and Nurofen brands. RB Hygiene Home will make up the rest and include brands like Calgon and Vanish. It will be led by Rob de Groot, currently executive vice president for RB Europe and North America.

A multi-year growth story, reaction from investors was muted Wednesday. Reckitt shares are currently down 14% since June’s all-time high, driven in part at least by the cyber-attack.

Reckitt shares currently trade on a forward earnings multiple of 19 times, a big discount (15%) to peers, according to Waldschmidt, who keeps his ‘buy’ rating and bullish £87 target price, implying potential upside of a quarter. Bank of America Merrill Lynch also remains positive, targeting £84.

Investec’s Hargreaves is more cautious, though, believing that RB’s recovery “will be slower than the market expects”. He predicts consensus earnings per share (EPS) downgrades of 3-4% for 2017 and 2018. “We consider the risk to both earnings estimates and the multiple to be higher than average,” he explains, reiterating his ‘sell’ rating and £64 target.

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.