Reckitt Benckiser
Revenue including pharma £2.37bn
Market debuts such as those of BCA and Aldermore may fall by the wayside, but the separate quote for Reckitt Benckiser’s pharmaceuticals division will be with us by Christmas, the company reassured yesterday, and in London rather than, as had been mooted, in New York.
This is despite the fact that almost all the business is in the United States. The company has one compound, treating heroin addiction, that is under attack from generic rivals but still has about 60 per cent of the market. This makes it hard to value, and market estimates are differing wildly only a couple of weeks before the issue of the prospectus.
This hardly matters. It is a straightforward spin-off, existing shareholders receiving one share for every one in Reckitt they hold, and no fresh funds are being raised.
Third-quarter figures give a clear enough idea why the pharmaceuticals business is being spun off, allowing Reckitt to concentrate on higher-growth health brands, such as Neurofen and Scholl.
Reckitt is one of those multinational consumer products groups that probably has spread itself over too many product lines. Like others, such as Diageo and Unilever, which reports tomorrow, it is being affected by the inevitable slowing in emerging markets as falling currencies and other factors take their toll on growth. Third-quarter figures from the group excluding pharmaceuticals came in a little light. Constant exchange like-for-like revenue growth was 3 per cent, slowing a little from the 4 per cent figure in the year to date.
Reckitt is convinced that it can meet earlier targets of 4 per cent to 5 per cent growth for the year as a whole, if at the bottom of this range, which implies some pick-up in the present quarter.
It also believes that margins will contine to grow, derived from general efficiencies and, eventually, the lower oil price.
Areas of weakness were Thailand, because of the unrest there, and Brazil, which experienced a general post-World Cup consumer malaise.
The shares, off 105p at £50.10, sell on about 19 times earnings. Reckitt is outperforming in most of its markets, but that multiple does not suggest much to go for.
My advice Hold
Why Group is doing better than the market trends in the areas it operates, but the shares are on a high rating and progress could be slow
BAE Systems
Cost of SilverSky $232.5m
BAE Systems continues to build up its Cyber & Intelligence business, which provides much-needed services to keep government and corporate networks safe. The company is having to pay some fruity multiples to do so.
It goes with the territory. BAE may want to lessen its reliance on the US defence market, but a lot of other companies are fishing in the same pond. Its involvement goes back to the 2008 purchase of Detica, now BAE Systems Applied Intelligence, and it is adding to this with the acquisition of Perimeter Internetworking Corp, of New York, which trades as SilverSky.
The price is $232.5 million, which represents a little more than three times expected revenues this year. BAE says that it is profitable, but it is a new company and will not increase group earnings until the third year after completion.
That revenue multiple is not out of line with prices paid by the likes of Dell and McAfee in cybersecurity. BAE has proven expertise in the area, about 7 per cent of revenues, but the focus will continue to be on defence.
I still believe that BAE shares, up 3¾p at 444½p, are worth holding for the 4.4 per cent yield.
My advice Hold/Buy
Why Dividend yield is attractive as cyber grows
InterContinental Hotels
Rise in revpar 7%
The hotels business, especially as operated by InterContinental Hotels Group, is a relatively simple one. Get the rooms as full as possible and then shove up the rates. The other factor is the supply of new rooms coming through, which has been limited in recent years because of the lack of finance, but is feeding through again.
IHG’s American hotels, the majority of the group, are about as full as they can be, thanks to the recovering economy and the return of business travel. So revpar — or revenue per available room — there was up by 8.7 per cent in the third quarter, ahead of the 7 per cent across the group, the majority of the rise coming from higher rates.
Britain and Germany were strong, China less so, with revpar growth there slowing to a near-halt. IHG has been in the country for three decades, but competition is coming into the market as the economy slows.
Earlier in the year IHG rebuffed a takeover approach from Wyndham Worldwide. It has an activist investor, Marcato, of San Francisco, sitting on a 4 per cent stake, having indicated it wants the group to be broken up and sold. It is not clear why IHG should be sold, or why it needs to be taken over. The number of rooms being added is growing by 2.7 per cent annually; those revpar figures look robust enough in most countries, though China is a question mark.
The sale of trophy assets is all but complete, although cash is still being returned to shareholders. The shares, up 5p at £22.54, sell on a hefty 21 times this year’s earnings and probably don’t justify much more than a “hold”.
And finally ...
Shares in GKN were up 3.6 per cent after a trading update that was better than expected. The company’s strengths are in commercial aerospace and light vehicles, while its Driveline business outperformed the global market. Military aerospace remains flat and demand for agricultural vehicles, served by Land Systems, is getting worse. There was organic growth of 3 per cent in third-quarter sales, but this was more than offset by the usual currency effects. These, as I have suggested before, will wash out eventually.
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