Reckitt Benckiser Group PLC (LON: RB.) – Increased confidence in medium-term revenue and margin targets.

Reckitt Benckiser Group PLC is a FTSE-100 listed Company, which develops, produces, acquires, and distributes consumer products. RB’s brands fall into three categories – Hygiene, Health and Nutrition. Each brand is in a unique position to be competitive. It is a trusted household brand that serves in over 190 countries. The Company sells nearly 20 million products a day globally. It employs more than 40,000 talented and diverse people worldwide.

The Hygiene Home portfolio helps in eliminating dirt, germs, odours, and pests from households across the world. The Health portfolio serves with products that offer pain relief, protection, nutrition, and wellness. The major brand includes Dettol, Strepsils, Clearasil, Veet, Harpic, Mortein, Vanish, among others.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

RB has recently announced an acquisition of Biofreeze (market leader in over-the-counter topical pain relief with roll-on, gel, spray and patch formats), which would deepen RB's Health platform and its presence in the broader pain category.

Overall, RB operates in an attractive and growth market segments, which is accelerated or accentuated by COVID-19 outbreak.  The exceptional conditions created by the Covid-19 pandemic shall help the Company to gain market share and benefit the portfolio of disinfectant brands, including Lysol and Sagrotan. Moreover, the increased consumption for hygiene products and preventative treatments shall uplift the portfolio of Hygiene and Health. Adjacently, lockdown and social-distancing measures have increased the consumption of household goods. Moreover, there is a shift in the distribution channel as shoppers have moved to online marketplaces. Furthermore, the Company has a disciplined capital allocation, which shall help them to continuously invest in a portfolio, generate strong free cash conversion, and sustain the dividend payout policy.

However, there are certain risk and uncertainties to business growth. The Company could fail to achieve the desired organic growth if it fails to adopt new go-to-market channels, and unable to respond to the disruptive market forces, including e-commerce, digital and new formats. The Covid-19 outbreak can create supply chain disruption. The increasing cyber-attacks also imposes a significant operational risk. Moreover, the Company can face reputational damage if it fails to adhere to strict product regulations regarding safety.

Industry Outlook Dynamics

According to the recent publication from the Research and Markets, the global hand sanitizer market is projected to surge at a CAGR of ~11.68% between 2020 to 2025 and reach a total market size of US$2,548.984 million by 2025. Meanwhile, the market size for global surface disinfectant is estimated to register a CAGR of ~7.6% from 2020 to 2027 and reach a market size of US$2.5 billion by 2027. There are several global trends that shall support the future market growth such as dense population in warmer regions should drive the demand for hygiene products, the growing ageing population should increase the demand for nutrition solutions, sexual wellbeing should be a growing priority as more young people reach adulthood, and technology savvy consumers would increasingly demand personalised solutions.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Reckitt Benckiser Group Plc.

Recent Developments

On 24 February 2021: The Company acquired the Biofreeze brand from Performance Health, representing a unique and exciting opportunity to unlock value.

On 24 February 2021: RB announced the proposed sale of Scholl to Yellow Wood Partners. This will bring greater focus to its portfolio.

A Glimpse of Business Segments

Financial and Operational Highlights (for the 12 months ended 31 December 2020 (FY20), as on 24 February 2021)

(Source; Company Website)

• The Company delivered a strong revenue performance with nearly £14 billion of sales and an increase of 11.8% like-for-like (LFL) growth. The growth was driven by volume-led growth in a Covid-19 environment.
• As per the segment, Hygiene division saw strong growth (mainly from Lysol and Finish), with an increase in LFL net revenue of 19.5% YoY. Hygiene business has improved overall market share and broad-based growth in all regions. Health LFL net revenue surged by 12.1% YoY, with strong Dettol growth in all key markets, improved overall market share performance, robust growth from Gaviscon and better Durex momentum (against the previous year).
• In the eCommerce channel, the Company had a record full-year growth of 56% YoY and account for approximately 12% of group net revenue.
• In terms of Geography, Reckitt Benckiser witnessed a strong LFL growth in all regions, mainly in North America. On a LFL basis, RB has improved its growth in Developing Markets, driven by Dettol and Lysol.
• Full-year adjusted operating margin was in line with mid-year guidance, but it was 260bps lower than the prior year.
• In FY20, the Company comes from loss to profit, with a full year reported operating profit of £2,160 million and reported diluted EPS of 159.3 pence.
• However, the adjusted diluted EPS decreased by 6.3% YoY, due to the tax benefits recognised in 2019 and the non-recurrence of certain interest.
• The Company’s free cash flow generation increased to £3,052 million as compared with the previous year (2019: £2,145 million), with net debt decreased to £9.0 billion.
• The Board has proposed a final dividend per share of 101.6 pence, bringing a full-year dividend per share of 174.6 pence.
• It has made a strong start in executing the new strategy, with plans to enter a further 29 markets in 2021.
• During 2020, the Company invested around £745 million in building capabilities, which build a stronger business for the future.
• For FY21, the Company expects LFL revenue performance to be in the range of flat to +2%, continued underlying progress towards the mid-single-digit sustainable growth target and growth in margins between 40-90bps (which is lower than 2020 levels).
• It also expects a strong first-quarter performance.
• Further, RB will deliver growth for hygiene and germ protection.
• In the medium-term, the average free cash flow conversion is expected to stay strong.
• Overall, the performance was decent, and the Company remains confident that they will meet the medium-term targets. 

Financial Ratios (FY2020)

Share Price Performance Analysis

On 15 March 2021 (before the market close, at 8:03 AM GMT), Reckitt Benckiser Group PLC shares were trading at GBX 6,208.00, up by 0.68% against the previous day closing price. Stock 52-week High was GBX 8,020.00 and Low of GBX 5,216.89, respectively.

From the technical standpoint, 90-day RSI (47.11), 20-day SMA (6,122.60), and 20-day EMA (6,164.04) are supporting the upside potential in the short-term.

Over the past 10 years, RB’s share price has delivered a stellar return of nearly +108.85% return as compared to return of around +19.41% return of FTSE-100 index and around +86.73% return of FTSE All-Share Personal Goods, which shows that the stock has outperformed the index during the last year.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

FY20 was a turning point for the Company as the performance was robust and its business capabilities enhanced with portfolio additions and culture transformations with strong progress against strategies. Therefore, the Group is confident that it will achieve its medium-term targets. Looking to the medium-term, RB expects to deliver mid-single digit organic revenue growth a mid-20's margin. Meanwhile, net finance expense is projected to be around 3% of average net debt and capital expenditure of over 4% of net revenue in FY21, as average free cash flow is anticipated to be strong. The net revenue growth is expected to be benefited with increased sales for Dettol and Lysol. Notwithstanding, there is a cautious outlook for FY21 due to the uncertain macro-economic environment.

(Source: Company Presentation)

Considering the decent track record of dividend payments, strong execution in a challenging environment, expect continued growth in 2021, increased confidence in medium-term revenue and margin targets, strong growth across the brands and geographies, acquisition of Biofreeze, strong free cash conversion, reduction in net debt, robust liquidity and financing flexibility, strong balance sheet, high level of cash generation capabilities, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Reckitt Benckiser Group at the current price of GBX 6,208.00 (as on 15 March 2021, before the market close at 8:03 AM GMT), with lower-double digit upside potential based on 24.42x Price/NTM Earnings multiple (approx.) on FY21E earnings per share (approx.). 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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