Reckitt Benckiser finals

Reckitt Benckiser Group is a manufacturer and marketer of branded products in household, health and personal care products, sold into nearly 200 countries from operations in over 60 countries.  I have a holding in my income portfolio (epic code: RB.) 


Reckitt Benckiser announced their final results today.  Full year revenue was £10,043m (£9,567m last year), an increase of +7% at constant exchange rates excluding the pharmaceutical business (RBP) or +5% LFL (ex RBP). 

Gross margin was increased by +150bps to 59.4%, although operating profit at £2,345m was down -4% , reflecting the impact of an exceptional pre-tax charge of £271m (2012: £135m). Excluding the exceptional costs from both years operating profits were up +1.5%. 

Net income was £1,739m, a decrease of -4.5%  compared to last year. On an adjusted basis excluding the tax effected exceptional items, net income rose +1.9%. 

Diluted EPS of 238.5p was -4% lower, although on an adjusted basis the growth was +2.5% to 269.8p compared to a market consensus of 267p and a range of 260-271p. 

The board is recommending a final dividend of 77 pence a decline of -1.3%, to give a full year dividend of 137 pence, an overall increase of +2.2% and covered 1.74x.  This is a disappointing increase given the reasonably strong performance and good cover.

By territories plus Food LFL sales growth (excluding RBP) was:

Europe/North America +3%,
Latin America/Asia/Australia & New Zealand  +10%,
Russia/Middle East/Africa/Turkey +5%.
Food 0% 
Group excl. RBP 5%

Net M&A added 2% growth to the Group with foreign exchange reducing it by 1%.

These levels of growth are in line with the guidance given in the third quarter IMS see here.  

By product groupings LFL (excluding RBP) sales growth was:

Health +10%
Hygiene +7%
Home +2%
Portfolio -12%

The pharmaceutical business continues to decline, with revenues falling 7% to £777m and operating profits reduced to £428m a fall of 21%, this is a slightly worse position than I was expecting.  This part of the business is part of a strategic review which is expected to result in the sale of the business, that may attract a price of between £3-3.5bn approximately 10% of the current market cap. for 18% of their operating income.

Financial strength was impressive with Free cash flow at £1,905m up 9.9% on last year and covers the dividend by 1.9x.  Net debt was reduced from £2,387m to £1,959m with gearing at 30.9%.  Debt to EBITDA was just 0.8x and operating cash flow 108% of debt.

With strong margins and adequate capital turns the return on capital at over 28% exceeds their weighted average cost of capital of just over 7% by a healthy margin.  Over the past five years the increase in NBV and dividends returned to shareholders have increased by an impressive CAGR of 27.6% pa.

Management's guidance is for net revenue growth of +4-5% at constant exchange rates and flat to moderate operating margin expansion excluding exceptional items, despite that they stated that market conditions are more challenging now than at the beginning of last year.

These are a good set of results from a solid business, the future of the Pharmaceutical business creates some uncertainty over valuation.  Ignoring any likely sale for the moment I would place a fair value of about 4900p on the shares, using last year's FCF and assuming that they grow it by 4% pa over the next 10 years and then 3% in perpetuity discounted by a cost of equity of 9%.

My only concern is what message management are attempting to communicate, by reducing the final dividend by 1.3% (having increased the interim by 7.1%), so that the full year dividend increase was just 2.2%, a rate of increase not seen for over a decade from Reckitt Benckiser.