Reckitt Benckiser Share Discussion Threads

[apad] 08/2/2012 19:30

IC comment

Reckitt Benckiser 's former chief executive Bart Becht is a tough act to follow, but new chief executive Rakesh Kapoor has wasted little time in making his mark after taking the helm at the household products giant in September.

Against the backdrop of better than expected 2011 results, Mr Kapoor outlined a strategic vision that he believes will allow Reckitt to continue to grow faster than rivals and increase operating margins. And, while the changes he pointed to may not be revolutionary, they do look like a sensible realignment of the group's focus towards the significant growth opportunity in developing economies. "This is a rebalancing of where growth is and where the organisational investment is," said Mr Kapoor.

He pointed out that, although 42 per cent of core sales come from emerging markets, only 36 per cent of group management is in these regions - by 2016 it is hoped that more than half of the group's leadership will be in these high-growth markets, with a similar shift in capital expenditure and marketing. Alongside its 19 existing 'Powerbrands', Mr Kapoor has added 16 new 'Powermarkets' such as Brazil, India and the Middle East, which will be earmarked for extra investment. "We need an organisation shaped for tomorrow and not for the past," he said. Half of core sales are expected to come from emerging markets by 2015.

Mr Kapoor also believes that focusing the group's marketing on a message of health and hygiene will resonate strongly with the needs of consumers in growth market. "We do not want to be a household cleaning company," he said, noting that the newly formed categories are "higher growth, higher margin and higher loyalty".

Broker Panmure Gordon expects underlying EPS of 239.4p for 2012 (247.1p in 2011).

RECKITT BENCKISER (RB.)
ORD PRICE: 3,484p MARKET VALUE: £25.4bn
TOUCH: 3,482-3,485p 12-MONTH HIGH: 3,595p LOW: 2,960p
DIVIDEND YIELD: 3.6% PE RATIO: 15
NET ASSET VALUE: 784p* NET DEBT: 31%

Year to 31 Dec Turnover (£bn) Pre-tax profit (£bn) Earnings per share (p) Dividend per share (p)
2007 5.27 1.21 131 55.0
2008 6.56 1.47 158 80.0
2009 7.75 1.89 199 100
2010 8.45 2.14 217 115
2011 9.49 2.38 240 125
% change +12 +11 +11 +9

Ex-div: 22 Feb

Payment: 31 May

*Includes intangible assets of £10.3bn, or 1,408p a share

IC VIEW:

Reckitt may be shifting its focus, but it won't change the financial practices that have made it a star performer over the past decade - not least a focus on turning profit into the cash which underpins healthy dividend payments. But worries over generic competition to its US pharmaceuticals persist and, with 2012 likely to be a"transition year", the shares could tread water for a while. So, with a forward PE of 15, the good news looks factored into the price. Hold.

Last IC view: Fairly priced, 3,464p, 26 July 2011

[apad] 08/2/2012 19:23

Even more from FT (cfs ULVR EI)

"Only Reckitt Benckiser people can get excited about corns," Rakesh Kapoor, incoming chief executive of the consumer products group, told analysts this morning, as he (excitedly) unveiled a new remedy.
Quite so. It takes more than the termination of toe barnacles to impress investors, when the 2012 operating profit of the business is set to grow at just 3-4 per cent, well below many peers. So, a lot rides on a reorganisation intended to raise revenues and margins in succeeding years.
The group, originally something of a brands ragbag, has grown strongly over the past decade by promoting a cluster of key products as determinedly as Barry Scott, erstwhile spokes guy for the Cillit Bang household cleaner.
The overlay Mr Kapoor is engineering is a strong focus on health and hygiene. A third strand in the strategy is to fight harder for business in strongly-growing emerging markets.
This looks like a "me too" philosophy, given stronger results earlier this week from Unilever, which has a heavier weighting to personal care and the developing world. But that does not make the plan a bad one.
But it is questionable how well Europe and North America can be combined into one "Powermarket" run, it is likely, from the UK, given cultural differences remarked by Reckitt's new broom himself, such as Americans' use of washing-up liquid to clean their hands.
Reckitt is outgunned in the US by the likes of Procter & Gamble. But North America still produced 26 per cent of adjusted pre-exceptional operating profits of £2.5bn in 2011, compared with just 16 per cent from emerging markets.
The Powermarket plan bears execution risks as well as rewards. In restructuring, as with corns, Mr Kapoor must avoid over-enthusiasm.

[apad] 08/2/2012 19:21

More from FT

Revealing Reckitt Benckiser's strategy, Rakesh Kapoor promised to "leave no question answered."
His slick presentation certainly impressed investors, and revealed a streak of derring-do – few other companies would dare run their US division out of Amsterdam, for example. And it drove the share price up 3 per cent in the process.
As a case for a re-rating of the stock, now trading close to decade-lows, Mr Kapoor's presentation was impeccable.
But he failed to deliver on that initial promise. The 16 "power countries" the company is focusing on remain shrouded in mystery due to "commercial sensitivities".
It also remains less than clear how straightforward it will be to run an American operation from across a rather large ocean. This is even more so at a time when peer companies, including Unilever and drinks maker Diageo, are splitting regions into smaller organisational units rather than enlarging them.
None of this seemed overly to concern the investment community. "Reckitt has passed the baton to the new generation of managers after what has been a great historical performance and shown the market there is still huge potential," said Harold Thompson, analyst at Deutsche Bank, house broker.
That potential comes – as it does for virtually every consumer goods multinational – from emerging markets. These account for some 38 per cent of revenues, and Reckitt is targeting 45 per cent by 2016. Technically, it is targeting 50 per cent, but Asia includes the developed markets of Japan, Australia and New Zealand.
However, Reckitt was a late passenger on the bandwagon, resulting in weaknesses – such as China – which Mr Kapoor acknowledges. It is also ramping up in these markets at a time when growth is decelerating, albeit to levels still buoyant compared with developed markets.
Mr Kapoor denies any suggestion of catch-up. "We have one of the best track records of growth in emerging markets," he said. While China is "not as good as we would like," he notes that the acquisition of SSL, maker of Scholl sandals and Durex condoms, doubled turnover in the country.
The focus on emerging markets means more resource allocation. Now, half of the company's £200m annual capital expenditure goes into the region. That will rise to 80 per cent in 2016. Marketing spend will also increase, from 44 per cent of the total budget to 55 per cent, as will that for senior management.
But what investors liked about the strategy is the underpinnings remain the same: top-line growth ahead of the market, steadily expanding operating margins (apart from this year when they will stay flat) and strong cash conversion.
Nor is the company holding off spending during its "year of transition". Marketing spend will rise by £100m, which analysts estimate to be a rise of 10 per cent. This will be mostly self-financed by cost-cutting programmes elsewhere.
"They've changed the packaging rather than the recipe," said Guillaume Delmas, analyst at Nomura. "Clearly nothing is broken. They are just going to continue the momentum."
In the past, under Bart Becht, who handed over the reins to Mr Kapoor last year, that translated into hefty outperformance. Returns from Reckitt left rivals in the shade, not least because superior products won over consumers.
The departure of Mr Becht, along with wobbles in performance, reversed that. Measured over the past two years, shareholder returns have lagged those of peers.
So has Mr Kapoor done enough to win a re-rating? For some, Like Martin Deboo at Investec, there is a valuation conundrum "because growth has lost some of its lustre but cash generation remains strong".
Another analyst cautions that Reckitt is still "a bit of a show-me story." Having unveiled big changes, they need to deliver on execution before meriting a higher multiple, he says.
But others reckon its fortunes are already on the turn. "Overall group growth and earnings prospects are as good as ever, and given the valuation is close to 10-year lows, there is room for a re-rating," says Mr Thompson.

[apad] 08/2/2012 19:06

Mug...
I also remember the IC recommending dumping Zeneca and keeping ICI!
I was quite pleased to have done the opposite.
apad

[brain smiley] 08/2/2012 11:48

LONDON (SHARECAST) - Cillit Bang maker Reckitt Benckiser reported better-than-expected headline earnings per share (EPS) and good top-line growth momentum in its full-year results today, according to Nomura which reiterated its buy recommendation on the consumer products giant.

Fourth quarter EPS came in at 74.2p, 2% above Nomura's 72.5p forecast (4% ahead of consensus estimates of 71.25p), while organic sales growth of 5% beat Nomura's expectations of a 3.9% increase (consensus: +3.6%).

"The company is guiding for 3-4% organic sales growth for the base business in 2012 and flat operating margin, despite higher investments," Nomura notes. Nevertheless, the broker is forecasting 4.3% organic sales growth a 50 basis point margin expansion for the base business (ahead of consensus) and 1% increase in net income at constant exchange rates.

Nomura says that, on its estimates, Reckitt's stock is trading at 13.8 times 2012 earnings, compared with sector rivals Procter & Gamble and Colgate which trade on an average price-to-earnings multiple of 15.6 (on consensus numbers).

Nomura maintained its positive view and 3,900p target price.

[mug punter] 08/2/2012 10:45

Apologies APAD, for some reason I thought you meant journalistic comment from the Lex column or Questor rather than more detailed information from the presentation and analyst comment.

Well done on ICI, the old barometer. I remember them demerging their pharma operations in Cheshire.

[essentialinvestor] 08/2/2012 10:29

With the amount in CAPEX ULVR is currently speding they would want
to have a good growth outlook - the ULVR CAPEX programme is staggering.

[apad] 08/2/2012 10:22

FT, Mug
QED

Reckitt set to merge global operations
By Adam Jones
Reckitt Benckiser is merging its North American and European operations into a single business run out of Amsterdam in an unusual move that demonstrates the growing importance of emerging markets to multinational consumer goods groups.
The maker of Finish dishwasher tablets and Durex condoms also said it would divide its emerging markets business into two entities, one featuring Latin America and Asia, the other covering areas as diverse as Russia and sub-Saharan Africa.

Rakesh Kapoor, Reckitt chief executive, argued that the decision to merge its North American and European businesses reflected a convergence in consumer tastes on both sides of the Atlantic.
"We find increasingly higher levels of similarity between Europe and North America in terms of consumer behaviour and consumer needs," said Mr Kapoor, who succeeded the long-serving Bart Becht at the helm of the group last year.
It no longer made sense to manage the two businesses separately just because of their geographic separation, he argued, adding that other companies needed to confront the same issue.
Reckitt declined to say how many jobs would be lost as a consequence of the move, announced as part of a new strategy released alongside its annual results on Wednesday.
However, the aim is that the transatlantic merger will save it £30m annually from 2013.
Mr Kapoor said resources would be shifted east and south as part of a plan to get half of the company's sales from emerging markets by 2016, excluding its "non core" food and pharmaceuticals arms. The current figure is 42 per cent.
The new division serving Latin America and Asia has been given the acronym Lapac, while the other emerging markets reporting area has been called Rumea.
Brands in the health and hygiene categories – such as Nurofen ibuprofen pills and Dettol disinfectant – will be prioritised as part of the shake-up. Reckitt is also planning to shut down its private label manufacturing operations.
Under the new strategy, Reckitt said it was looking to deliver average annual like for like sales growth 2 percentage points higher than its markets over five years. It estimated that its markets would grow by between 1 per cent and 2 per cent in 2012.
Analysts at Panmure Gordon, the broker, said Reckitt was trying to "engineer better growth out of fairly insipid market growth rates". Unilever, the rival consumer goods group, had a better outlook for sales growth, they added.
In 2011, Reckitt's sales rose 12 per cent to £9.49bn, aided by the acquisition of SSL International, the maker of Durex, and India's Paras Pharmaceuticals.
Like for like sales growth was 4 per cent at constant exchange rates in 2011, down from a growth rate of 6 per cent a year earlier. Like for like sales growth was 3 per cent in the fourth quarter of 2011.
Full-year pre-tax profit rose 11 per cent to £2.38bn in 2011. Diluted earnings per share were 237.1p, up from 213.8p.
Reckitt shares, which have broadly tracked the rise in the FTSE 100 over the past three months, rose 2 per cent to £34.55 in early morning trading in London on Wednesday.

[apad] 08/2/2012 10:18

EI
I buy soda crystals, my daughters buy Vanish. Crazy world.
apad

[essentialinvestor] 08/2/2012 09:53

Well APAD it's another reminder for me to continue that way.
I also thought the UKX at approx 5840 looked ripe for some sort of
correction - wrong!.

[apad] 08/2/2012 09:43

EI - I don't short either :-)

Mug
Well done on the hold - I have AZN since ICI days.
The FT usually does a good job on finding data I miss, even the IC sometimes. I'm very good at missing data.
apad

[essentialinvestor] 08/2/2012 09:22

Way better than I expected APAD on the outlook, nice result.

[apad] 08/2/2012 08:58

Results seem to be in line with forecasts at first reading.
Haven't dug out the revenue from non-domestic markets yet.
Be interesting to see what the FT says.
Price has come back in-line with the FTSE over the last month or so.
Boring
Hold
apad

[icf absolute] 07/2/2012 20:45

Youre using very different terminology to standard accounting practices but i'll go with your terminology for this matter. So looking at working capital; RB has always in the past had negative working capital, its not an issue and more to the point it was less than £90 mln (on sales of £8.4bln or operating profit of £2.2bln) in 2010. I fail to see what your point is?

[apad] 07/2/2012 17:49

EI
RB. has dropped away from the FTSE in the last 2 days so Mr. M might be sharing your view :-)
'See' you here tomorrow morning!
apad

[apad] 06/2/2012 21:04

ICF we don't disagree at all, and yours is the usual terminology.
I just use the term free cash where you use the term working capital.
The question is, said Alice, 'whether you can make words mean so many different things.'
My "free cash flow" is the usual - i.e. cash flow less capex, and is not related to my "free cash".
As to whether Working Capital should be a component of one of the numerous definitions of Free Cash Flow.....scary.
So, what do you think of my substantive point?
apad

[icf absolute] 06/2/2012 20:37

APAD

Im sorry but thats nonsense, you're calculating working capital and that is very different to free cash flow. Free cash flow is not current assets minus current liabilities. Its rather Operating cash flow minus Cap-ex and for this company that equated to + £1.4bln or £1.98 per share est for 2011

[essentialinvestor] 05/2/2012 18:05

Genius! - he was so funny without a script as well,
some great Groucho Marx stuff on you tube.

[apad] 05/2/2012 17:41

ICF
I take the definition of free cash as
current assets - current liabilities
it gives one a feel about whether companies have enough to cope from day to day. Companies like RB and ULVR, brewers and the like, tend to be negative - RB is far too negative at the moment, based on its own history and comparison with peers (such as ULVR).
I use price to free cash flow (i.e. take out the CAPEX per share)and compare it with the PER (big difference needs a look). RB. is 20 cf about 16, using normalised EPS. Not too bothered about that.
To paraphrase Groucho Marx, these are the numbers I use. If you don't like them, I've got others.
apad

[icf absolute] 05/2/2012 15:41

"Negative free cash"? i think youre mistaken, the company's on a 7% free cash flow yield for last year, rising to 9% expected for 2012 full year...

also, this sector in aggregate has one of the highest and most predictable levels of free cash flow generation within the market as their cap-ex requirements are so low. Youre looking at the wrong level of data imo

[apad] 05/2/2012 13:58

Last year's free cash was negative and high (this sector always seem to be on negative free cash, don't know why). ULVR is much more regular (perhaps 'cos it's bigger).
Price to Free Cash Flow Ratio is 20, which, whilst not Value share territory, is not bad (BTW EI, AZN is 8! Amazing cash machine.). However, this metric is very sector specific so comparisons are not straight forward.
Results need looking at carefully but there is a growth story and it isn't big in the sector.
apad

[essentialinvestor] 05/2/2012 10:05

Would not touch at this time imv - the current price is a gift.
DYOR as always.

[apad] 05/2/2012 09:08

Same article in the Obsipendent.
Could be a good downward bump on Wed/Thur for an income top-up.
My decision will depend crucially on the trend in debt levels - they paid a lot for Durex.
apad