When you are operating in as many geographical markets and product categories as Reckitt Benckiser, you cannot expect all of them to do well. The company seems to have hit a bit of a poor patch, though. The question is whether, given similarly lacklustre trading updates for the third quarter from other global consumer products groups such as Danone and Unilever, this represents a structural shift for businesses that have done well from the move towards greater prosperity in developing markets.
Rakesh Kapoor, Reckitt’s chief executive, says not. The long-term drivers are still there for the “powerbrands” on which it is focused. Reckitt’s health and hygiene products were the best performers. The fall in sterling has, of course, had an enormous effect and is the main reason why the shares are more than 13 per cent higher than at the start of the year, even after yesterday’s 2.6 per cent fall to £71.35 after those disappointing third-quarter figures.
Of the negatives, plainly Brazil is a difficult market, as is Russia. In neither are consumers greatly inclined to spend on expensive global brands. Various innovations within the Scholl franchise were not launched as successfully as they might have been. Scholl has been something of an overlooked brand and there is potential for an uplift if the company can get those innovations right.
Yet the main problem has been South Korea and the legacy of 73 deaths apparently from a toxic disinfectant that was sold as a sanitiser in humidifiers. Reckitt has set aside £319 million to deal with the financial implications, but the reputational damage has hit sales of all its products in that country. It is almost impossible to see how this will play out, although we are not quite talking Deepwater Horizon.
The consequence is that Reckitt has had to nudge back expectations for the year. Take out exchange-rate effects and other factors such as acquisitions and disposals and sales in the third quarter were up by an underwhelming 2 per cent, poor for a company that has tended to grind out 4 per cent to 5 per cent growth each year. It will be lucky to achieve 4 per cent this year. That isn’t bad, but doesn’t quite justify an earnings multiple of 24.
My advice Avoid
Why It is too soon to say if decreased revenue growth is the start of a trend but the shares still command a high rating
Travis Perkins
The 4 per cent decline in Travis Perkins’ share price is another of those cases where you wonder just why the stock market did not see this one coming.
The slowdown in Britain’s central heating and plumbing market has been widely flagged and companies such as Wolseley and Grafton have taken action. It comes from a combination of factors, the ending of government boiler scrappage incentives in 2014 and the squeeze on local authority budgets for social housing.
Then you have to add the consequences of price deflation in copper and steel. Suppliers had more branches than they needed and some have been closed.
Travis Perkins gets a quarter of revenues from heating and ventilation, but only 10 per cent of profits. About 40 per cent is supplying those local authorities, which shows just how low the margins on such work is. It will have to wait to see how the market pans out before taking any further decisions, but a like-for-like sales fall of 4.1 per cent in the third quarter indicates why action is needed.
The shares, off 66p at £14.22, sell on 11 times’ earnings, but do not buy at present.
My advice Avoid
Why There could well be more bad news to come
Laird
One should not be too cynical, but when a new management comes in and issues a profit warning within weeks, there must be a suspicion that there has been a bit of deck-clearing.
Profits at Laird were already going to be static this year, at about £75 million, because of a slowdown at its wireless automation and controls business, which supplies complex switching systems for freight trains, for example. The problems at its performance materials side, which supplies subcontractors to smartphone makers such as Apple and Samsung, will clip that figure to £50 million.
The reasons are not entirely clear. Those subcontractors have delayed boosting programmes for those smartphones, while Laird is under unprecedented pricing pressure from them. Just how this will pan out is anyone’s guess. The company could simply walk away from this side of the business, given the prospects for the other half — wireless systems — in providing devices that increase automotive connectivity.
This will depend on a further turnround at Novero, the business acquired at the start of the year that has signally underperformed. There must be a temptation for the new management to go for a rights issue to wipe out debt, expected to be about £300 million at the year’s end.
This makes the shares, off 150p at 158½p, a hard choice for investors. They sell on about 11 times’ next year’s earnings. This is a a tricky call, but they look like a highly speculative “buy”, despite the uncertainty over that rights issue.
My advice Buy
Why Highly chancey, but cheap if Laird can avoid a rights issue
And finally . . .
Primary Health Properties, a share much followed by this column for its secure dividend yield, has completed its first acquisition in Ireland, a care centre in Tipperary. The cost is a relatively modest €6.7 million, but it is a significant step. PHP buys mainly NHS properties for the long-term rent and recycles this as dividends. It has almost 300 assets. The Irish healthcare system faces similar pressures to the NHS in terms of an ageing population and rising costs and good-quality health centres will always be in demand.
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