Reckitt Benckiser Group Plc (RB) is a consumer health and hygiene company that manufactures and markets household, toiletry and health care products. These consist of air fresheners, laundry products, dishwashing detergents, disinfectant sprays, water softeners, household cleaners, and personal care products. It also sells over-the-counter (OTC) drugs, cough and congestion tablets. Sinus relief products, gastric liquids, hair removal and pest control products. Its area of operations categorised into segments like Heath and Personal Care products, Home & Hygiene and Portfolio products, during FY18 company's 62% of total sales came from Health & Personal care products, and 38% of total revenue came from Home, Hygiene and Portfolio brands.

Key Brands: Air Wick, Bang, Calgon, Clearasil, Cilit Bang, Dettol, Durex, Finish, Gaviscon, Harpic, Lysol, Mortein, Mucinex, Nurofen, Scholl, Strpsils, Vanish, Veet, and Woolite.

Vital Statistics

Health business overview: Company is engaged in providing over-the-counter (OTC) drugs for fever, cold, pain, sore throat problems, and flu problems. Comprise medicated sore throat relief products, sexual wellbeing, condoms, cough and congestion tablets, sinus relief products, acne treatment creams, facial washes and cleaning pads, analgesic products, upper gastrointestinal products, footcare products and others.
Major brands include Strepsils, Durex, Mucinex, Nurofen, Nutramigen, Gaviscon and Scholl.

Home business overview: Provides air care, fabric treatment and garment care products, water and fabric softeners, laundry detergents and shoe care products for leather shoes.
Major brands include Air Wick, Calgon, Vanish and Woolite.

Hygiene business overview: Provides personal hygiene products and home hygiene products for residential customers. Comprise antiseptic liquids, disinfectant cleaners, lavatory cleaners and speciality cleaners, automatic dishwashing products, pest control product solutions for domestic infestations, hair removal products and depilatory products for skin care and acne treatments.

Major brands include Harpic, Dettol, Veet, Lysol, Finish, Clearasil, Cilit Bang and Mortein

Portfolio brand: Provides laundry detergents, fabric softeners and ironing aids.

Recent Developments:

On 18^th February 2019, Company reported its full-year financial result for the period ended 31^st December 2018. As per board announcement on 16^th Jan’19, Rakesh Kapoor had shown his intention to retire as Chief Executive Officer of the company by the end of 2019. He is been with the company from last 32 years and active as CEO for more than 8 years. In November 2018, Reckitt group exercised a direct-to-consumer deal with SCI regarding the Enfamil formula.

Financial Highlights- FY18

(Source: Company filings, LSE)

Highlights

For FY18, company reported total sales of £12,597 million, up by 3.0% on both pro-form and LFL basis, including consideration of their MJN business for a full 12 months. At constant currency basis company reported a sales growth of 15 per cent. Majority of Reckitt Benckiser Plc sales were generated outside the UK. Stronger pound against the basket of currency in which they operate resulted in the growth of negative 5 per cent. Reckitt Health business grew by 3 per cent on a Pro-forma basis and by 2 per cent on Like-for-like basis. Health business witnessed improving trend in all of the segments. Infant Formula and Child Nutrition business grew by 3 per cent in FY18 on account of strong market growth in China and innovation. Their Hygiene business grew 4 per cent on Like-for-like basis, on account of the improved market condition and successful innovation. All brands within Hygiene business unit witnessed stronger growth led by Harpic and Lysol. On geographical standpoint, emerging economies witnessed strong high-single-digit growth on LFL basis, North America also witnessed good mid-single-digit growth during the year, but European market remained tough, sales impacted in Europe mainly on account of challenging pricing environment. During the period ended 31^st December 2018, the company's cash generated from continuing operation stood at £3,330 million as compared with £3,153 million in FY17, improved by 5.6 per cent. For FY18, Net Debt was reported at £10,406 million compared with £10746 million in FY17. The Board of Reckitt Benckiser announced a final dividend of 100.2 pence and full-year dividend stood 170.7 pence per share 3.9 per cent higher against the FY17 full-year dividend of 164.3 pence per share. The Company reported adjusted earnings per share of 333.9 pence for FY18, up marginally by 10 bps against the previous financial year. Gross margin for FY18 stood at 60.6 per cent, reduced 70 basis points on a Pro-forma basis and 40 basis points on a reported basis. Lower margin was driven by a combination of input costs and a tough pricing environment in Europe. The company also increased its operating and capital expenditure in many verticals to meet the demand of their customers. During FY18, operating margin stood at 20.1 per cent improved 20 basis points on a Pro-forma basis and declined 60 basis points on a reported basis. Finance cost was stood at £325 million in FY18 compared with £238 million in FY17, increased significantly due to the acquisition of MJN in mid-2017. In the financial year 2018, Net income attributable to shareholders stood at £2,161 million, dipped by 65 per cent as compared with FY17 data, due to an exceptional item of £3,024 million in relation to the profit on sale of the Reckitt’s food business,  US tax reform of £1,421 million and an investigation charge by US Department of Justice of £296 million. On an adjusted basis net income was up by 4% at £2,410 million. Free cash flow for FY18 stood at £2,029 million compared with £2,129 million in FY17.

Stock Performance – 1Yr


(Source: Thomson Reuters)

Commentary

At the close (04-Mar-19), shares were quoting at GBX 5,899, added 36 points or up by 0.61% against its previous close price. Shares have registered a 52w high of GBX7,174.0 and a 52w low of GBX 5,225.0. At the close, the stock was trading 18.27% lower against its 52w high and 11.57% higher against its 52w low.  In last one-year stock has delivered a return of +2.43% (as on 4^th March) and on a year-to-date basis, the stock was down by -2.49%. Stock’s beta of 0.93 reflects its shares are less volatile against the benchmark index. Share’s 5-day average daily volume was 2.06% higher against the 30-day average daily volume traded on the London Stock Exchange. At a simple moving average standpoint, the stock was trading 7.7% below its 200days Simple Moving Average (SMA).

Financial Ratios and Valuation

(Source: TR)

Valuation Methodology

Valuation Method 1

 
While valuing Reckitt Benckiser Plc on EV/EBITDA based valuation, we have considered NTM EV/EBITDA of its peers which were, Nestle SA (NTM EV/EBITDA of 16x), Danone SA (NTM EV/EBITDA of 12x), Henkel AG & Co KgaA (NTM EV/EBITDA of 11x), Beiersdorf AG (NTM EV/EBITDA of 15x), L'Oreal SA (18.5x), and Kerry Group PLC (17.5x) respectively.
 
Valuation Method 2 (EPS (FY19E) approximately)

 
Note: All forecasted figures and peers have been taken from Thomson Reuters.

Conclusion
Reckitt Benckiser Plc has a strong business model and strong brand positioning in Asia, Europe and American market, with significantly high EBITDA and Net Margin compared with the peers operating in the same sector. Based on strong fundamental we have given a BUY recommendation with single digit upside potential (based on 15.1x NTM EV/EBITDA on FY19E EBITDA) or (based on 17.5x on FY19E EPS).

*The buy recommendation is valid for the current price as covered in the report as on (4th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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