Acquisitions And Cost-Cutting 'Not Enough' To Boost Reckitt Benckiser: Analysis

By Steve Wynne-Jones
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Acquisitions And Cost-Cutting 'Not Enough' To Boost Reckitt Benckiser: Analysis

Household and consumer health-care giant Reckitt Benckiser needs to focus less on acquisitions and cost-cutting if it wants to appease shareholders, according to a leading industry analyst.

Following the publication of the Nurofen parent's full-year results earlier today, Russ Mould, investment director at pension, investment and stockbroker firm AJ Bell, said, "A return to sales growth in the fourth quarter, increased cost-saving targets and a higher dividend are not proving enough for shareholders in Reckitt Benckiser, whose shares are the worst performers in the FTSE 100 in early trading."

Reckitt Benckiser posted flat like-for-like revenue (at constant-currency levels) for full-year 2017 (£11.5 billion), with an increase of 2% reported in the final quarter of the year (£3.29 billion).

Revenue growth at actual currency rates was 21%, reflecting a positive currency-exchange impact, as well as M&A activity.

“The problem may not be the numbers themselves, but the tepid sales growth guidance for 2018 and the reliance on cost-cutting for earnings surprises [as this is lower quality than growth for organic revenue increases], as neither help to support a valuation that already represents a big premium to the wider UK market," Mould added.


Acquisition Targets

The company's biggest acquisition last year was that of Mead Johnson Nutrition in June, which brought infant-nutrition brands Enfa and Nutramigen into the RB portfolio. Reckitt said that the integration of the business is "firmly on track", with $25 million worth of synergies already achieved.

In addition, Reckitt Benckiser has been more recently been linked with a bid for Pfizer's consumer health-care division, the home of Anadin and Advil, but Mould suggests that relying on acquisitions to boost growth could be a risky strategy for the business.

“Reckitt’s brand strength, lofty margins and record of consistent profit and dividend growth can justify a premium rating, to some degree," he commented, "but using acquisitions to fuel growth raises the risks involved [owing to the debt associated with the Mead Johnson deal and the danger that something goes wrong during integration] and lowers the quality of earnings [given the reliance on cost-cutting, rather than top-line growth].

“In addition, Reckitt could also become involved in an auction for the consumer health-care operations of Pfizer, which are up for sale, with a rumoured $20 billion price tag, straight after a year when the Mead Johnson deal has taken net debt at the company from £1.4 billion to £10.7 billion and the cost of borrowing has finally started to rise once more,” Mould  added.


He noted that shares in Reckitt have de-rated from 22 times their earnings at their peak last summer.

Future Strategy

Reckitt Benckiser, meanwhile, is holding out hope that its recent creation of two business units –Health and Hygiene Home – established in January, will help to drive long-term growth.

The move was implemented to 'leverage the structural shift we are seeing in retail channels and consumers’ shopping behaviours', according to the company, with the group now positioned to 'unlock long-term growth and value creation'.

Its Health arm, which accounts for 44% of net revenue, includes brands such as Durex, Nurofen, Strepsils and School. This division reported net revenue of £5.09 billion last year.


Its Hygiene business (38% of net revenue), including brands such as Dettol and Finish, and Home operations (16% of net revenue), which includes Air Wick and Vanish, are being consolidated as part of the new structure.

“2017 was a significant year in RB's journey to become a global leader in consumer health," commented Rakesh Kapoor, the company's chief executive.

"For 2018, we are targeting 13-14% total revenue growth [implying 2-3% LFL revenue growth]. Whilst 2018 will see some specific factors impacting margin, we reiterate our medium-term target of moderate operating margin expansion,” Kapoor added.

Expect Reckitt Benckiser's shareholders to be following its progress closely in the coming months.

© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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