Wednesday, 11 February 2015

Reckitt Benckiser finals

Reckitt Benckiser Group is a manufacturer and marketer of branded products in household, health and personal care products, sold into nearly 200 countries from operations in over 60 countries.  I have a holding in my income portfolio (epic code: RB.) 

Reckitt Benckiser announced their final results today, their first results announcement since the demerger of their pharmaceutical business as Indivior in December 2014, so all of my comments exclude the pharmaceutical business. 

Net revenue was £8,836m, an increase of +4% at constant exchange rates, although a -4.6% decline on a reported basis.  Gross margin was increased by +100bps to 57.7% the main driver behind a 160bps increase in the adjusted operating margin to 24.7%.  Reported operating profit was £2,164m an increase of 14.7%, although if we exclude exceptionals (2013 was hit by £210m of legal costs) the increase is 2%.

By territories LFL revenue growth was:
ENA (Europe/North America) +2%; (+2% at the interim stage)
LAPAC (Latin America/Asia/Australia & New Zealand)  +5%; (+7%)

RUMEA (Russia/Middle East/Africa/Turkey)  +11%; (+5%)

Food +3% (+3%)

South Africa and Turkey experienced strong double digit growth and Russia had a strong year, although Ruble weakness would have probably eliminated any growth in reported terms.
By product groupings like-for-like sales growth (excluding Food detailed above) was:

Health +8% (10%)

Hygiene +3% (3%)

Home +1% (0%)

Portfolio -5% (-6%)

Diluted EPS from continuing operations was 227.6p, an increase of 18.4%, but excluding those exceptional items mentioned above, adjusted EPS was up 3.8% at 230.5p.

A final dividend of 79p was declared - an increase of 2.6%, to give a full year dividend of 139p, an increase of 1.5%.  The dividend is covered 1.64x by earnings and 1.9x by free cash flow (FCF).

FCF was a healthy £1,934m compared to £1,906m last year.  The main calls on FCF were dividend payments of £988m, net purchase of shares of £201m and £340m on acquisitions.  Net debt was reduced by £304m to £1,655m and gearing reduced to 24.2%.  Net debt was just 0.7x EBITDA and operating cash flow was a substantial 127% of net debt. 

Management stated that their 2015 targets are like-for-like net revenue growth of +4% and moderate to "nice" (I'm assuming this is the colloquial meaning - being attractive or agreeable) operating margin expansion.

Their new project - "Supercharge" will incur exceptional costs of £200m in 2015, but will produce annualised savings of £100-150m.

Their medium term key performance indicators are:

  • Growth in net revenue of 200 bps a year ahead of the global market growth across their categories and geographies.

  • A moderate operating margin expansion. 

  • Above average growth in Health & Hygiene so that they will represent 80% of the company's net revenues by 2020, currently 72%.

  • Above average growth in developing markets so that they will represent 40% of company net revenues by 2020, currently 30%.


Reckitt Benckiser operates with a low weighted average cost of capital of 7.6% and adds substantial value by returning operating profits in excess of 25% on its capital employed.  Over the past three years its FCF has returned 23% on its average capital employed.


This has translated into shareholder returns over the past 3 years that have been excellent, with an IRR of almost 22% pa (dividends not reinvested).

An excellently run company, but at 5775p fully valued at 25x historic earnings and a yield of 2.4%.  If we assume earnings and dividend growth of ~5% that's still a prospective p/e of 23.9 and a yield of 2.5%.  

Using a DCF valuation with FCF growing by 5% pa for 10 years and 3% in perpetuity with a 9% (cost of equity) discount rate, it place an intrinsic value on the shares of 5313p.  Today's price of 5775p assumes a 6%pa growth in FCF for the next 10 years, with no margin of safety. 

1 comment:

  1. In sure the company will improve with the project, but RB must doesn't quite cut the mustard. It's basically too expensive for what type getting back. The previous 1p cut was also very disappointing. At present, there are no socks in this sector that match my criteria, although PZ Cussons did appear in my January screener...