Reckitt Benckiser

Stock price: p3241
Conclusion: We expect the weakness in Europe and the potential threat from generic competition in pharma to continue to weigh on stock price. We also need to be convinced that SSL was worth 18xEBITDA. We stay on the side line.

H1 results: net sales up 7% reported (+6% constant)-net income up 19% (+18% constant). Q2 up 10% (+6% constant)-net income up 23% (+18% constant). Reiterating FY targets for the business excluding pharma: +5% sales and +10% EBIT at constant rate.

Stable growth at first sight, but household sales slowing down
-Health and personal care returned to double digit growth in Q2, driven by Dettol and Lysol ranges.
-Household products sales were hit by lower demand combined with greater promotional activity in Europe. All categories suffered, notably fabric care, the largest one (down 3% in Q2) but also surface care and home care are slowing down. Dishwashing is the only segment to report faster growth in Q2. Sales in Europe fell 1%, while the business in the US resisted better, up 4% and emerging markets kept rising (+19%)
-According to management, market growth dropped quickly below 1% in Europe, while the US market is now flat. RB lost less than 1pt in fabric care, while P&G took some share in Europe. Volume growth (+4% ex pharma) should remain under pressure in Europe in H2, while pricing impact (+1% in H1) should fade.
-Margin excluding pharma improved 100bp to 20% in H1, driven by gross margin (80%) and positive leverage (20%). Part of the gain was also due to lower media spending, down 40bp to 11.7% of sales. However, it was partly offset by rising promotion spending.
We look for €7.6bn sales ex pharma for the full year and operating profit of €1673m (+10%). In the absence of new news regarding potential generics in pharma we assume that sales should remain stable this year and could decrease 80% next year.

SSL acquisition: worth 18xEBITDA ?
RB is offering £2.5bn to acquire SSL, leader in condoms and footcare with two key brands Durex and Scholl. The offer values SSL around 3.2x sales and 18xEBITDA based on F11 estimates (£866m sales -£138m EBIT). We estimate that SSL acquisition should enhance 2011 EPS by +1%.
-SSL will enhance RB’s exposure to the faster growing personal and health care business (more than a third of the future business), increase the critical mass in Asia, notably China and Japan, and provide costs synergies estimated at £100m by the end of 2012.
-Nevertheless, some clarification is needed. First, it remains to be seen what RB will do with local brands, own label products and footwear which account for roughly 30% of SSL sales. Second, SSL is essentially a European business, with a sizable exposure to Asia but it is almost absent from the US. It might have sooner or later to buy out the US right to the Scholl brand held by Merk. Durex also will have to compete against a dominant player in the US, Trojan. Thirdly, we find the amount of costs savings forecasted by RB (11.5% of sales) difficult to justify in the absence of manufacturing overlap.

RB trades at 15.7xP/E and 11.3xEV/EBITDA based on our 2011 estimates including SSL and assuming 80% decline in sales for the pharma business. Our DCF points to a higher share price of €3800p. Nevertheless, a rerating would require some recovery in Europe and also a detailed business plan for SSL. Consequently, we expect the stock price to stay within a trading range of p3200-p3500 per share in the coming months.

Reckitt Benckiser

Stock price: p 3497
Conclusion: Despite some weakness in Europe, Reckitt is on track to grow earnings ex pharma by 10% this year. Reckitt stock price is getting close to our valuation range of p3650-p3800 per share. Potential generic competition in the pharma business remains the key risk.

Q1 results: sales up 5% organic, EBIT up 10% ex pharma, in line with 2010 guidance. Group sales including pharma up 5% to £2bn, net income £348m +15%, EPS +13%.

Q1: a mixed bag but Reckitt is delivering.
-Top line (+5%) skewed towards emerging markets. Developing markets grew by 19% accounting for around 75% of Reckitt growth in Q1. North America increased sales by 4%, while Europe reported zero growth.
-We expect sales in Europe to remain flattish this year as competition won’t stop in fabric care and dishwashing, where Procter is committed to gain share. Growth in emerging markets should not be extraprolated and we are looking for mid teens expansion for the full year compared with high single digit growth for the market, while North America could slightly accelerate as confidence comes back. All in all, sales ex pharma could reach £7.5bn in 2010 (+5.2%).
-The good news comes from margin, helped by lower than expected raw material costs on the gross margin front and also further media deflation. In addition, emerging markets should benefit from positive pricing. Last, profitability in North America and Europe will be enhanced by cost optimization initiatives. We expect the 100bp gain in Q1 to be sustainable for the full year and look for 22.2% margin ex pharma.

Reckitt trades at 17.7P/E and 12.2xEV/EBITDA based on our 2010 estimates. EPS outlook including pharma remains uncertain given the absence of news regarding potential generics threat in pharma. We assume 80% fall in sales in two years, leading to flat reported EPS for 2010 and 2011. However, Reckitt’s cash generative base business justifies a DCF based valuation of around p3800 per share.

Reckitt Benckiser

Stock price: p3201
Conclusion: Superior business model, as usual. Nevertheless, the expected emergence of generic competition in its highly profitable pharma business should continue to weigh on the stock price. We prefer to wait until the announcement is behind us to buy Reckitt again, as we think that excluding pharma Reckitt is still worth it.

2009 Results: Sales up 18% to £7,7bn (up 8% like for like)-EPS up 23%. Guidance 2010 ex pharma: looking for sales up 5% and EBIT up 10% excluding exchange rates

2009 once again exceeded forecasts.
The good news in Q4 came from the core fabric and home business which returned to +3.5% growth in the quarter, while health care revenues rose by 13%.
+13% net income at constant exchange rate looks great compared with peers (cf Unilever -7% EPS). The business model works even in a tougher environment. Strong innovation, savings in media rates reinvested in other consumer marketing spending, cost optimisation, focus on cash flow and working capital inflow.

Management targets for 2010 look achievable.
-5% top line ex pharma is feasible even assuming that the core fabric and home business would not dramatically accelerate against last year’s +2.6% growth rate. We have no reason to be optimistic, in light of today’s weak consumer confidence. Nonetheless, health and personal care should continue to grow double digit helping to reach 5% ex pharma.

-10% organic growth in earnings ex pharma would imply on our estimates, a 120bp rebound in European margin (impacted last year by restructuring charges), positive leverage in North America (+60bp) and increased profitability in developing markets (+150bp).

-EPS will depend on the timing of the arrival of generics in the pharma business. We assumed a loss of 40% of the business in 2010 and a further 65% decline in 2011. Reported EPS could therefore remain fairly stable for the next two years around p193-p192. Excluding pharma, we expect Reckitt earnings to grow almost double digit in 2010 and 2011.

Altough management said that it will remained focused on internal growth, we think Reckitt is ready to resume acquisitions. FCF reached £1.8bn last year (up£700m) helping to restore a net cash position of £215m. We expect FCF to decrease to £1.5bn in 2010 as a result of lower contribution from the pharma business and optimised working capital which will be difficult to further improve . Net cash could reach £1bn, giving Reckitt more room for manoeuvre. Management will target acquisitions in Asia and Latin America and look to enlarge its health care business.

Reckitt trades at 16.6x P/E based on our 2010 and 2011 estimates. We think that the uncertainty regarding the timing of the arrival of generics in pharma will hold back the short term performance. However, our DCF suggests a valuation closer to £3800p, driven by the superior cash generation of Reckitt. We raise our valuation range to £3650-3800 per share. Once the EPS outlook will be clarified, we expect the stock to resume its growth momentum.

Reckitt Benckiser

Stock price: £30.7
Conclusion: In spite of upgraded guidance we stick to our valuation range of £32-33 per share. The 15% return we were looking for is now behind us and we feel that the stock looks fairly priced. Further re-rating would require improved visibility in household products.

9 months: sales up 20% reported (£5.7bn), up 7% like for like. Net earnings up 29% reported, up 13% like for like. Guidance raised for 2009: revenue growth +6-7% like for like, +12-13% adjusted net income, +22-23% at actual exchange.

A mixed bag in Q3 with excellent growth in health care and pharmaceutical but a sharp slowdown in household and home care.
-Reckitt’s health care brands (Nurofen, Strepsils, Mucinex..) performed strongly (+16% in Q3, +14% 9m)
-Growth in pharmaceuticals reached 41% in Q3 (+42% 9m) thanks to increased penetration of Suboxone in the US.
-Sales in household and home care products were clearly disappointing, notably fabric care and dishwashing (2/3 of sales), which dropped by 4% and 5% respectively in Q3. It seems that the premiumisation strategy which has been working very well in the past, is now struggling at a time when consumers are looking for value. As a result of the economic downturn, Reckitt has to invest more than in the past into promotional spending in order to maintain its share of the European market.

Operating margin progressed by 130bp of sales to 22.6% helped by higher gross margin (+90bp) and lower media expenses (-170bp to 11.5% of sales), implying a negative impact of other charges, notably promotions, of -130bp.

Going forward, investors will be increasingly looking at the performance of the household division, as management reiterated that 80% of the revenues and profits of the pharma business might be lost following the expected launch of generic competitors in the US. As a result, Reckitt will need to show a return to growth in fabric care and dishwashing.
Management might have to further increase promotion while the fall in media rates should decelerate, leaving less room for manoeuvre from a margin standpoint.

Reckitt trades at 16.5x P/E based on 2010 estimates, which seems fair considering the lack of visibility in pharma. Our DCF model confirms our valuation range of £32-33, following the loss of the US Suboxone business next year.

Reckitt Benckiser

Stock Price : £29,17
Conclusion : 10% return since April 28, more to come !

H1 results: Sales up 8% like for like, 23% reported, Net income up 13% like for like, 32% reported. Management upgraded guidance from +4% to +5-6% revenue growth and +8-10% to +10-11% net income (constant exchange rate).

-Reckitt keeps gaining share with sales ex pharma up 6% in H1 (+5% in Q2) against +3% growth for the market. We expect sales in the second half of the year to be driven by new product innovation, notably the launch of Dettol through the pharmacy channel in Europe, Dettol Naturals in developing markets, Vanish Oxi Action Gel, Woolite Complete, Airwick i-motion and Strepsils cool…
Importantly, growth should rely on volumes with less pricing in H2, which bodes well for future visibility.

-As to margins, there are still opportunities on input costs in H2, but most of the big wins are behind us. In addition, the negative impact from foreign exchange rate should mitigate in H2. Last, Reckitt will continue to benefit from the decline in media spend, which reflects the impact of lower media rates rather than a reduction in brand support.

-Financial expenses were lower than expected helped by +48% increase in net cash flow from operations (£884m) and a £571m decrease in net debt at the end of the half year (£525m). We expect Reckitt to be debt free next year, which should enable management to seize acquisitions opportunities.

-Suboxone will lose its exclusivity in October 2009. Generic competition will come but the question is when ? Management reiterated that 80% of revenues might be lost, in line with consensus forecast.

-The stock gained 10% since our last comment and is now trading at 15.4x and 16.2x P/E based on 2009 and 2010 forecasts. We raise our price target to £32-33 a share following revised guidance from management.

Long Reckitt at time of writing.

Reckitt Benckiser

Stock Price: p2641
Conclusion: A good entry point for 15% upside

Q1 results: sales up 8% like for like, 27% reported, Net income up 11% like for like, 35% adjusted after forex

Reckitt once again outperformed peers in the sector. At a time when all competitors are struggling with subdued growth and pricing pressure, Reckitt managed to continue to expand its business at a rapid pace. Reported numbers are also helped by a strong positive forex impact. The strategy which paid off in good times is also working in a more adverse environment. Why do we like Reckitt ? Brand focus, strong innovation, superior marketing support, strong cash generation and ability to acquire and successfully integrate new businesses. Management is targeting 4% growth in sales and 8-10% growth in profits this year. We are looking for 20% growth in EPS this year, helped by forex. Next year, growth will be held back by lower sales and profits (-80%) from Suboxone in the US as a result of the loss of exclusivity in the US at the end of September 2009. However, this is a one off and we expect Reckitt to resume growth in 2011.

The stok is down 10% in one year and we feel the current valuation offers a good entry point. Our DCF leads to p3100, taking into account the fall in the pharma business next year. Net debt came down £400m to £693m as a result of FCF generation. We expect Reckitt to seize new acquisition opportunities (Sara Lee business ?) to compensate for lower income from Suboxone.