Reckitt Benckiser Group PLC (LON: RB.) – Robust Balance Sheet and Sustainable Business Model

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 which 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 the 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. Regarding the sustainability goals since 2012, the Company has reduced the waste per unit by 27%, and reduced water use per unit by 37%. 

 (Source: Company Presentation)

Growth Prospects and Risk Assessment

The exceptional conditions created by 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.

 (Source: Kalkine Group, Refinitiv)

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.

Key Fundamental Statistics

Key Shareholders Statistics

A Glimpse of Business Segments

The breakup of segmental revenue and Operating Profit H1 FY2020 are as follows:

(Source: Interim Report, Company Website)

Key Performance Indicators

(Source: Annual Report, Company Website) 

Financial & Strategic Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, the Company reported an increase of 10.8% in net revenue, while like-for-like basis revenue surged by 11.9%.
• The Company reported Hygiene like-for-like sales growth of 16% and Health growth of 9.3%, while total estimated e-commerce sales grew more than 60%.
• RB delivered decent profitability margins for the period, driven by operational leverage from COVID-19 tailwinds and improving underlying performance.
• On 30 June 2020, the net debt declined to £10,202 million, reflecting strong free cash flow generation for the period.
• Reckitt Benckiser Group declared an interim dividend of 73 pence per share and stood in line with guidance and policy.
• The Company made the announcement of Reckitt Global Hygiene Institute in July, and under RB Fight for Access Fund, it allocated around 1% of expected operating profit for FY2020 to benefit communities and also announced new environmental ambitions.
• The Company has made a strong start to its plan to Rejuvenate Sustainable Growth with the introduction of a new structure, strong execution through the improvement of supply chain performance and increasing capacity to meet exceptional demand.
• RB has also made an investment in core growth capabilities and introduced an expanded plan to capture growth opportunities for Lysol and Dettol.

Financial Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Reckitt Benckiser Group Plc has delivered a decent return for the shareholders’ as return on equity of 10.6% was higher as compared to the industry median of 8.9%. On leverage front, the debt-equity ratio was 1.28x, which was higher as compared to the industry median of 0.64x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance Analysis

(Source: Kalkine Group, Refinitiv)

On 28 September 2020 (before the market close, at 10:28 AM GMT+1), Reckitt Benckiser Group Plc shares were trading at GBX 7,474.72, up by 0.05% against the previous day closing price. Stock 52-week High was GBX 8,020.00 and Low of GBX 5,130.20, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 20-day (GBX 7,443), 100-day (GBX 7,385) and 200-day (GBX 6,775) simple moving average prices, which reflects an uptrend in the stock.

 (Source: Kalkine Group, Refinitiv)

In the last one year, Reckitt Benckiser Group Plc share price has delivered ~18.73% return as compared to ~ negative 19.92 % return of FTSE-100 index, which shows that the stock has outperformed the index during the last year.

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

 (Source: Kalkine Group, Refinitiv) 

Business Outlook Scenario

Following the strong performance demonstrated in H1 FY20, the Company expects to end the FY20 with better net revenue, earnings, and margin. The favourable tailwinds from COVID-19 shall support high single-digit growth for FY20. The net revenue growth is expected to be benefited with increased sales for Dettol and Lysol. Notwithstanding, there is a cautious outlook for H2 FY20 due to the uncertain macro-economic environment.

Overall, the Company expects investments to more heavily weighted to the H2 FY20 and to continue into FY21. In addition, the Covid-19 costs are likely to be incremental in H2 FY20, while margins are expected to be in line with market expectations. Looking to the medium term, the outlook for mid-single-digit organic revenue growth and mid-20's margin by FY25 remains unchanged.

(Source: Company Presentation)

Considering the enhanced strategic initiatives, strong financial performance and support from the valuation as done using the above method, we have given a “BUY” recommendation on Reckitt Benckiser Group Plc at the current price of GBX 7,474.72 (as on 28 September 2020, before the market close at 10:28 AM GMT+1), with lower double-digit upside potential based on 26.10x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).  

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

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

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