There was a time during last week’s selling frenzy when every share in the FTSE 100 was trading in the red. Dealers were taking the view that no blue-chip company was immune to coronavirus.
When a semblance of positive sentiment began to briefly slip back in, among the few shares to gain ground was Reckitt Benckiser, the consumer goods group.
Traders concluded that with popular products such as Nurofen and Dettol, its sales stood to benefit from a virus-inspired health and cleanliness drive. With a battery of problems, most of them of its own making, the group could do with all the help it can get.
Reckitt Benckiser was formed in 1999 through the combination of Reckitt & Colman, a British company, with Benckiser, the Dutch company. One of the world’s biggest producers of consumer goods, including Strepsils throat sweets, it competes with companies such as Unilever, Procter & Gamble and Johnson & Johnson.
The group operates two divisions: health goods, including Dettol and Nurofen, and hygiene home brands such as Air Wick freshener and Harpic bleach. However, in future it will report a third — nutrition — after a review undertaken by Laxman Narasimhan, 52, the chief executive who took charge in September.
On the face of it. the health and hygiene argument over the impact of Covid-19 makes self-evident sense. The heightened need for the world’s population to wash its hands and keep surfaces clean — and manage its temperature if a fever comes on — will improve sales of some of Reckitt Benckiser’s goods. Only it’s not that simple. At the end of his review, Mr Narasimhan concluded that the group had a strong array of brands, flying in the face of the feeling among some analysts and investors that additional investment in areas such as marketing would not go amiss.
It is also undeniable that Reckitt Benckiser faces pressure on sales from low-cost competitors, including supermarkets’ own-brand goods.
As an aside, there have been questions about whether brands such as Nurofen that contain the ibuprofen anti-inflammatory exacerbate Covid-19, but Reckitt Benckiser said yesterday that it was not aware of any medical evidence suggesting that and its appropriate use is recommended by most health authorities in Europe.
Even if the group has consumer loyalty, it has been battling with problems with its supply chain and relationships with retailers that have meant that sometimes, even when shoppers have sought its products, they have not been able to get them.
Mr Narasimhan has acknowledged the operational problems. His solution is a £2 billion investment programme over the next three years designed to rejuvenate sales .
Much of the organisational changes, including productivity efficiencies and lifting retailers’ stock, is due this year. Mr Narasimhan is hoping that, by 2023, Reckitt Benckiser will be beating the historical underlying growth rates in its categories of about 3 per cent and heading towards his goal of midsingle-digit rises.
It is an ambitious task and, aside from any virus-related sales gains, it probably means that the group’s growth will be lacklustre, at least for this year.
The shares, meanwhile, down 74p, or 1.38 per cent at £53.00 at the close, are trading at 18 times Morgan Stanley’s forecast earnings for a prospective dividend yield of just under 3.3 per cent. The size of the turnaround makes them unappealing.
ADVICE Hold
WHY Aside from a virus-related boost, long-term growth is problematic and the turnaround will take several years
Aston Martin Lagonda
The wheels didn’t come off Aston Martin Lagonda, but for a time last week it must have felt dicey. The cash-strapped luxury carmaker had to rapidly reinvent a proposed £500 million capital raising after its linchpin investor, the Canadian billionaire Lawrence Stroll, 60, invoked a material adverse change clause in his contract to renegotiate the price.
The company swiftly gave Mr Stroll a bigger stake, for less money, and slashed the price of an accompanying rights issue to ensure that the fundraising now has a racing chance of getting away.
Founded in a London workshop in 1913, Aston Martin Lagonda makes luxury motors famed for their use in James Bond films and its marques include the DB11. The shares, floated at £19 apiece in October, have been a disappointment, haemorrhaging value from day one as analysts questioned the valuation and investors fretted about growth.
The carmaker is pinning its hopes on the DBX, its first move into the luxury market for sports utility vehicles. Production of the DBX, due to be launched during the next few months, has begun at a new factory in St Athan, south Wales. Aston Martin Lagonda needs to raise the capital to finance production at St Athan’s until payments for its sold vehicles come in and to strengthen its balance sheet. It had net debts of £876 million as at the year-end, or more than seven times adjusted profits before tax and other items.
Assuming no last-minute hitches, Mr Stroll will pay £171 million, or £2.25 a share, for a 25 per cent stake in the business. The carmaker’s other shareholders need to decide whether to subscribe for a four-for-one rights issue at 30p a share.
Existing shareholders should probably subscribe for the shares in order to avoid further paper losses — the shares fell 30.2 per cent, or 62¼p to 143¾p yesterday — and because the money ensures its survival and means substantial forward orders can be met.
The numerous risks for Aston Martin Lagonda, including a debt position that remains far too high, the fragilities of the luxury market, and in particular future sales in China, a key market, mean all other investors should drive by rapidly.
ADVICE Avoid
WHY With a debt problem, more cash might be needed
