Reckitt Benckiser Group Plc

Reckitt Benckiser Group Plc (LON: RKT) is a FTSE 100-listed global Company offering consumer goods. The Company operations are divided into three categories being Hygiene, Nutrition and Health.

Rationale for Valuation – Buy at GBX 6,271.00

• The Company witnessed a two-year like-for-like net revenue growth to over 17%.
• The Company also saw strong demand for the brands, with better execution and increased capacity.
• RKT is confident in the outlook for both 2021 and the medium-term.
• Demand for Dettol and Lysol continues to be strong as consumers stay vigilant against the spread the Covid-19 virus.
• In FY20, the Company has decent fundamental metrics as it has maintained a net margin and ROE above the industry median.
• From a technical standpoint, 14-day RSI (38.34 levels) supports an upside potential.

Key Risks

• The Covid-19 outbreak can cause massive supply chain disruption and increase operating costs.
• Moreover, extreme weather and water shortages can also impact the business.
• Lack of product regulations and product safety can lead to safety risks.

Q1 FY21 Trading Update (as on 28 April 2021)

(Source: Company Website)

• On a like-for-like basis, the net revenue was in line with the expectations.
• The Company has shown a strong demand for the brands, with continued investment.
• It also saw double-digit growth in Finish, Air Wick and across most regions, with white space expansion for Lysol.
• Moreover, the Company witnessed double-digit growth in eCommerce sales.
• Overall, the Company made a good start to the year, backed by £1 billion investment over the next ten years.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings based valuation (Illustrative)

Conclusion

In the medium-term, the Company expects to deliver mid-single-digit revenue growth and adjusted operating profit margins in the mid-'20s by the mid-2020s. In FY21, the Company expects like-for-like revenue growth to be in the range of 0-2% and adjusted operating profit margin to be between 40 to 90bps lower than the 23.6% in FY20. 2021 has started well, with strong demand for Lysol and Dettol. In the US and Latin America, IFCN performance remains strong. It also saw improved trends in parts of ASEAN. In the Health business, it has strong growth in Gaviscon, with improved execution overall. Overall, the performance was decent, and the Company remains confident that they will meet the medium-term targets. The stock made a 52-week low and high of GBX 5,782.00 and GBX 8,020.00, respectively.

Based on the strong demand for the brands, higher net margin 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 6,271.00 (as on 12 May 2021 at 11:00 AM GMT) with a lower double-digit upside potential based on 24.05x Price/ Earnings (FY21E) (approx.) on FY21E earnings per share (approx.).

Tesco Plc

Tesco PLC (LON: TSCO) is a United Kingdom-based leading retailer Company. It serves millions of clients every week through stores as well as online space.

On 18 June 2021, the Company will release its Q1 FY22 trading statement.

Rationale for Valuation – Buy at GBX 226.95

• The Company remains committed to a strong balance sheet and is well-positioned to build on the momentum.
• The Company stated that its sales were exceptionally strong, with gaining customers from all key competitors and growing UK market share in the year.
• On a trailing 12 months, EV/Sales, EV/EBITDA and Price/Cash Flow multiples of the TSCO are currently lower than the corresponding multiples of the Food & Drug Retailing industry.
• From the technical standpoint, 20-day SMA stood at GBX 225.31, which is supporting the upside movement.

Key Risks

• The banking and money services are likely to remain gloomy in the short-term.
• Future labour cost hike may impact the profitability of the business.
• A changing regulatory environment may adversely affect the activities.
• Also, the Company is exposed to the COVID-19 pandemic, including the closure of retail stores.
• The COVID-19 outbreak is having a short-term seismic impact on the industry.

Financial Highlights (for the 52 weeks ended 27 February 2021 (FY21), as on 13 April 2021)

(Source: Company Website)

• In FY21, the Group sales increased by 7.1% YoY at actual rates, while it’s like-for-like sales surged by 6.3% YoY.
• Furthermore, UK online sales rose by 77% YoY to £6.3 billion while, the banking operations were in line with guidance.
• The Company witnessed a strong balance sheet, with a decrease in net debt of £0.3 billion.
• The Board has proposed a final dividend per share of 5.95 pence, bringing the full-year dividend per share to 9.15 pence.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

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

Conclusion

The Company expects a strong recovery in retail free cash flow. The retail operating profit is expected to recover to a similar level as in the financial year 2020. On the front of Tesco banking business, it expects a return to profitability in the financial year 2022. Overall, TSCO is well-placed for the financial year 2022 and expects a strong improvement in profitability margins, while trading conditions likely to remain volatile. Moreover, the pace and scale of recovery in profitability are highly dependent on the economic outlook, which remains uncertain. The dividend was in line with last year, reflecting its confidence in future cash flows and the importance the Board places on dividends paid to shareholders. The stock made a 52-week low and high of GBX 201.70 and GBX 259.62, respectively.

Based on the strong balance sheet, gaining customers and support from the valuation as done using the above method, we have given a “BUY” recommendation on Tesco at the current price of GBX 226.95 (as on 12 May 2021 at 12:55 PM GMT) with a lower double-digit upside potential based on 14.15x Price/ NTM Earnings (approx.) on FY22E earnings per share (approx.).

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

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

Disclaimer 

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.