Has the prospect of a swift vaccine for Covid-19 and a return to something like normal life wiped the sheen off Reckitt Benckiser (Miles Costello asks)?
While much of the London market was rallying on Monday after breakthrough trials by Pfizer, the American drugs developer, and Biontech, its German partner, shares in the FTSE 100 consumer goods group were heading the other way. They had been at near-record highs, but at one point were down by nearly 9 per cent (though they recovered some of their poise later). It seemed that the investment case, so clear when the pandemic was unchecked and the rush to buy disinfectant and hand sanitiser was more like a stampede, was suddenly up for debate.
Reckitt Benckiser was established in 1999 through the merger of the British company Reckitt & Colman and Benckiser, of the Netherlands. As one of the world’s biggest makers of consumer brands, it competes with Unilever, Procter & Gamble and Johnson & Johnson.
Under the leadership since last September of Laxman Narasimhan, 53, the company has reorganised itself from two divisions into three. The hygiene business, which includes the Cillit Bang and Calgon brands, generates about 42 per cent of revenues. Health, including Dettol, the disinfectant, accounts for 35 per cent and the remaining 23 per cent comes from nutrition.
Mr Narasimhan has set about improving problematic areas at the group, including a poor supply chain that was failing failed to get products on to store shelves, and has committed to a three-year, £2.2 billion investment programme programme to increase sales.
You don’t have to look far to see why Reckitt has performed well of late. Covid-19 has made people far more conscious about hygiene and sales shot up as countries headed into lockdown. The pandemic arguably has accelerated a long-term global trend towards greater cleanliness, particularly in more densely populated urban areas.
Nevertheless, the recent success has been striking. Group like-for-like sales rose by 13.3 per cent over the third quarter and were up by an underlying 12.4 per cent to more than £10.4 billion in the nine months to the end of September. That growth was driven by a 19.5 per cent sales increase at the hygiene division in the third quarter and a like-for-like improvement of 12.6 per cent in the health unit. Reckitt upgraded its revenue guidance to “low-double-digit” growth over the full year.
Even nutrition, which includes the troublesome baby formula business that came with the $18 billion acquisition of Mead Johnson three years ago, improved like-for-like sales by 4.1 per cent.
Despite the drop in the share price on Monday, the investment case for Reckitt Benckiser still stands, even if it is not quite as white-hot as before. It is possible that as the world begins to wrestle control from the coronavirus we become lazier about frequent handwashing; what seems more likely is that sanitisers, together with an array of other cleaning and hygiene products, become a fixed feature in hotels and restaurants, bus and railway stations. This should only benefit a business that seems more operationally efficient in the hands of its relatively new boss.
Reckitt Benckiser’s shares rose by 238p, or 3.5 per cent, to £69.38 yesterday and have increased by 30.6 per cent since this column recommended holding them in March. They trade for a reasonable 21.2 times Morgan Stanley’s forecast earnings and carry a yield of a respectable 2.5 per cent. They are worth owning for the long term.
ADVICE Buy
WHY Operationally improved, locked into accelerating trend towards greater cleanliness and the shares don’t yet look overly dear
SSP
The relief was palpable (Dominic Walsh writes). After nine months of suffering death by a thousand cuts, the leisure sector finally had reason to hope. News of a potentially effective coronavirus vaccine sparked extraordinary share price moves, none more so than that of SSP, the airport and railway station caterer, which surged by 51.8 per cent. Yesterday, its shares continued to rise, adding another 37¾p, or 13.3 per cent, to 321¼p.
Yet that is still half the level at which SSP’s stock was trading before the pandemic, such was — and is — the scale of SSP’s exposure. The woes of airlines in the face of travel bans and lockdowns has turned airports into ghost towns, while working from home has done something similar to railway station concourses.
SSP operates about 2,800 food and drink outlets at 180 airports and 300 train stations in 36 countries. It operates its own brands, such as Upper Crust and Camden Food Co, plus franchises, including Burger King and Starbucks.
In September, it reported a £1.3 billion slump in second-half sales. While there had been some improvement in passenger demand and it had reopened a third of its outlets, weekly sales were down 95 per cent year-on-year in the third quarter and by 76 per cent in the fourth.
Such a drastic collapse has required equally drastic action by Simon Smith, 48, SSP’s chief executive. In June he announced up to 5,000 job losses in the UK alone and has taken steps to cut costs, preserve cash and strengthen the company’s finances. The question is whether, with a monthly cash burn of £25 million, the £500 million of liquidity headroom that SSP declared in September is enough. After launching a £216 million share placing back in March, SSP said that it was “confident that it has sufficient funds to allow it to operate throughout even its most pessimistic scenario”.
Morgan Stanley suggested SSP might need to raise more equity to ease pressure on covenants, arguing that “a jump in the share price might be the catalyst as this makes equity issuance less dilutive”. Either way, the prospect of a viable vaccine will boost the SSP recovery story.
ADVICE Avoid
WHY Pandemic and its longer-term impact remain unclear
