Sunday 16 December 2018

Reckitt headache unlikely to turn into a migraine

Share Watch

'Any managerial headaches it can reach into the boardroom cupboard and fetch some of its Nurofen painkillers.' Stock image
'Any managerial headaches it can reach into the boardroom cupboard and fetch some of its Nurofen painkillers.' Stock image

John Lynch

Reckitt Benckiser, the British consumer goods giant, has a very useful product portfolio to deal with its traumas it has encountered in recent months.

For any managerial headaches it can reach into the boardroom cupboard and fetch some of its Nurofen painkillers. And for clean-ups, it has Cillit Bang cleaning spray. Headache pills, however, would have been the most helpful as directors have been obliged to confront a pretty devastating series of painful encounters.

First it had a catastrophic scandal in Korea, where a disinfectant it made there, was linked to many deaths. A number of its Korean directors were charged and jailed for their part in the tragedy and compensation claims totalling £300m (€337m) had to be met.

More recently it had a cyber attack that was said to have cost it as much as £100m (€112m) in lost sales. In between it had to tell the market that its turnover had fallen for the first time since the group was formed in 1999.

Reckitt has also managed to lose four of its top 10 executives and its chairman and is currently in the midst of a makeover that may see it in further need of the Nurofen. This is despite it being one of the British multinationals that was tipped as being Brexit-proof by virtue of its huge foreign earnings. It has sales of £10bn (€11.2bn), operates in 60 countries, employing 27,500, and is valued at £46bn (€51.8bn).

In 1999 the group was created with the merger of Dutch company Benckiser and the UK's Reckitt and Colman. It then went on an acquisitions rampage. Within five years of the tie up, it purchased Boots non-prescription products, acquiring brand names like Strepsils and Clearasil. Four years later it picked up major brand Mucinex, followed by Durex condoms and Scholl footwear.

Reckitt makes and sells health and hygiene products, treatments for sore throats, coughs, water softener, fabric treatment and infant nutrition.

In the early part of this year Reckitt purchased the US group Mead Johnson, a category leader in infant and children's nutrition. The acquisition fits neatly into its health portfolio and should develop sales in emerging markets where Mead is strong. The global market is growing at 4pc per annum underpinned by changes in China's one child policy.

The recent problems that have bedevilled the group have affected its sales growth, but the group expects revenue to recover before the year end. It is harder to predict how the management upheaval is going to affect the company at a time of significant uncertainty internationally. There is a feeling that the tide may be turning against the big global brands in favour of local companies, whose provenance may be becoming more acceptable.

However, Reckitt investors were pleased that dividends increased last year and with its strong cash flow it should continue. Revenues were almost £10bn and expected to rise to £12bn (€13.5bn) this year. Pretax profits were impressive at £2.6bn (€2.9bn).

Interestingly, the majority of its revenue and profits are earned outside the UK. Investors are concerned following the share price fall from a yearly high of £81 (€91) to £65.83 (€74.14) today.

Earlier this year the group exited its food business, selling it to the US concern McCormick for $4.5bn (€5bn). Shareholders are watching to see if the proceeds will be used for a special dividend or an acquisition. However, the company has signalled that it does not intend to buy back shares until its debt is materially lower.

Some analysts are of the opinion that Reckitt is among the best of large cap UK companies. They point out the group is strong in both developed and emerging markets, has high operating margins and enough firepower for any further acquisitions.

However, in key markets like China, the value of global brands may have lost their magic and groups like Reckitt could feel the pinch if this trend continues. A cautious approach is needed to a Reckitt share purchase.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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