Where to start with Reckitt Benckiser? A bumper acquisition that seems to be taking a long time to digest and is causing hiccups in the process? Questions about sales in the United States and China? Doubts about margins and investment levels? Tribulations over bumpy product launches and factory shutdowns? Or nervousness about long-term organic growth.
At least the chief executive of the giant consumer goods group is new to the job and has several months to prepare for his big strategy day in February, time that will give him the chance to imprint his ideas on the group. Meanwhile, shares in the FTSE 100 stalwart could do with a couple of Nurofen to help to relieve the discomfort.
Reckitt Benckiser is one of the world’s biggest producers of consumer goods, vying to sell products to improve our health and homes with the likes of Unilever, Procter & Gamble and Johnson & Johnson. Formed in 1999 through the merger of Britain’s Reckitt & Colman and the Dutch company Benckiser, it makes products in two categories. Its health brands include Dettol, Clearasil, Gaviscon and Strepsils and its hygiene home portfolio contains products from Finish, Vanish and Harpic to Cillit Bang and Calgon. The business employs more than 40,000 staff across more than 60 countries and generates annual revenues of more than £12.5 billion. Its stock market listing values it at more than £41.7 billion.
The task facing Laxman Narasimhan, 52, the former Pepsico executive who relaced Rakesh Kapoor, 61, as Reckitt’s boss in September, is a daunting one. One of his early tasks, in October, was to cut the group’s full-year revenue growth target to between zero and 2 per cent. It was the second time that Reckitt had scaled back its sales outlook, which at the beginning of the year had forecast growth of between 3 per cent and 4 per cent.
The main culprit is the health unit, where underlying sales fell over the first nine months of the year, depressed in part by lower demand for its flu treatments in the United States and its baby formula milk in China. The division is in the latter stages of integrating Mead Johnson, the US-based baby nutrition producer that it bought a little over two years ago in a deal worth just under $18 billion. Buying Mead Johnson was an ambitious move that, among other things, increased Reckitt’s exposure to China — a position that, given recent indications of weakening sales and rising competition in the country, it will hope not to come to regret. Folding the group into the business has clearly disrupted sales. Revenues in health were also held back by a relatively subdued flu season in America.
Hygiene home, incidentally, is not performing as well as the group wants, but a 3.3 per cent increase in like-for-like sales during the first nine months of the year is far less of a headache to worry about.
Among the bigger issues that Mr Narasimhan will have to tackle is the group’s profit margin which, at 23.6 per cent, is industry-leading. The City is clear that the high margins reflect weak investment in its brands and analysts would welcome additional outlay. The new boss also will have to decide how far to push a decision by his predecessor to separate health and hygiene home into two distinct businesses.
The shares, up 10p or 0.2 per cent at £59.14 yesterday, might trade below some of their peers, but they are hardly cheap. Valued at 17.8 times consensus forecast earnings for a dividend yield of about 2.9 per cent, they are not hugely tempting at the moment.
ADVICE Avoid
WHY Big turnaround project for new chief executive that might yield rewards, but the shares are not cheap
Elementis
When this column looked at Elementis in March, it came away enthusing about the speciality chemical company’s acquisition of a talc producer called Mondo. This part of the business, which became a standalone division, has since found trading tough. Mind you, for the group as a whole the year so far has been pretty much a stinker.
The beginnings of a global macroeconomic slowdown have depressed demand from the manufacturing and industrial customers that Elementis serves. While the group remains convinced of the long-term potential of its specialist markets, its shares have lost 10 per cent since January.
Elementis, formed as a tea trader in 1844, moved into chemicals in 1947 and now operates five divisions. Personal care makes ingredients in cosmetics; coatings produces chemicals used in industrial paints; and talc’s products are used in plastics. Together, these three units generate 80 per cent of profits. The other divisions are chromium, whose products are used in leather goods, and energy, with additives serving the oil and gas sector. Every division apart from energy reported falling revenues and operating profits in the first half and the grim performance continued in the third quarter. However, Elementis also said that there had been an improvement in the latter weeks that augured well for a second-half recovery.
A capital markets day last month further boosted sentiment, with a plan for $15 million of cost savings by 2022 — on top of $10 million delivered this year — and targets of lifting the profit margin by a percentage point to 17 per cent and bringing leverage down from about 2.5 times pre-adjusted profits to a manageable 1.5 times.
Demand next year is expected to recover and over the medium term to run at levels comfortably above the annual GDP growth of the economies in which Elementis operates. That helps to explain the minor recovery in the shares — up yesterday by 5½p, or 3.4 per cent, at 166p — since the start of November. The stock, flat against its level in March, trades for 14.2 times Numis’s forecast earnings and yields just under 4 per cent. Investors who bought should hang on.
ADVICE Hold
WHY This year was poor but 2020 is predicted to be better
