Reckitt: Brands, Transformation and Future Potential
Reckitt: Brands, Transformation and Future Potential
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Contents:
1. Key Facts
2. Business Overview
3. Management
4. Industry
5. Financial Analysis
6. Competitive Advantages, Opportunities and Risks
7. Valuation
8. Conclusion
1. Key Facts
Description: Reckitt Benckiser Group plc ("Reckitt", “RB” or the "Company"), trading under the ticker symbol $RKT.L, is a global consumer goods company that specializes in the sale of health, hygiene, and nutrition products.
Key Financials: Over the period FY13 to trailing twelve months (“TTM”) Q2 FY23, the Company depicted a net revenue Compound Annual Growth Rate (“CAGR”) of 5.2% and operating income CAGR of 5.1%, reaching a TTM revenue of £15.01B and operating income of £3.42B (margin of 22.8%). Reckitt has cash and cash equivalents of £1.03B compared to total debt and lease liabilities of £8.64B.
Price & Market Cap (as of 26th September 2023): Its market cap is £41.6B with a 52-week low of £55.02 and a 52-week high of £65.7, whereas it currently trades at £57.92.
Valuation: Reckitt trades at a TTM EV/EBITDA of 12.9x (10 Year average of 16.1x) and a TTM EV/Sales of 3.3x (10 Year average of 4.4x).
2. Business Overview
Background
Reckitt Benckiser is a United Kingdom-based company listed on the London Stock Exchange since 1999, following the merger Reckitt & Colman and Benckiser NV. With a mission to "improve the hygiene, health, and nutrition of people across the globe", Reckitt has accumulated over two centuries of history, shaping its evolution into a prominent player in the consumer goods industry.
RB boasts a diverse and comprehensive brand portfolio, featuring some of the most trusted and recognizable names worldwide. These household brands include among others, Lysol, Vanish, Harpic, Finish, Air Wick, Dettol, Nurofen, Strepsils, Durex, and Enfamil.
Source: Reckitt Presentation at Consumer Analyst Group of New York Conference (CAGNY) 2022
Over the years RB has been growing through a combination of organic initiatives and strategic acquisitions. While many of these endeavors have contributed positively to the Company's expansion and market presence, it's important to note that not all acquisitions have proven equally beneficial for shareholder value. A notable example is the acquisition of Mead Johnson Nutrition (“MJN”) in 2017 for £13B, which led to material impairments for RB.
Notable acquisitions and divestments over the past three decades
Acquisitions:
1994: Acquisition of the long-established disinfectant brand Lysol, following its purchase of L & F Products for $1.55B.
2006: Acquisition of Boots Healthcare International for £1.9B, bringing in main brands like Nurofen, Strepsils, and Clearasil.
2008: Acquisition of Adams Respiratory Therapeutics for $2.3B, adding Mucinex brand to its portfolio
2010: Acquisition of SSL International for £2.5B, which included brands such as Durex and Scholl.
2012: Acquisition of Schiff for $1.3B (£813 million), a leading provider of branded vitamins, nutrition supplements, and nutrition bars, primarily in the US.
2014: Acquisition of the K-Y brand for £322 million
2017: Acquisition of Mead Johnson Nutrition, a major player in infant nutrition with brands Enfa and Nutramigen, for cash consideration of £13B ($16.6B).
2021: Acquisition of Lanai Holdings, owner of the Biofreeze brand for $1.06B (£766 million).
2021: Acquisition of Queen V, a women's intimate wellness company.
Divestments:
2017: Sale of RB's Food business to McCormick & Company, Inc. for $4.2 billion (£3.2 billion).
2021: Disposal of the Scholl Brand for £272 million, realizing a £165 million loss.
2021: Disposal of IFCN (Infant Formula and Child Nutrition) China for $2.2B (£1,4B), resulting in pre-tax loss on the disposal of £3.3B.
Source: Investor Day Seminar Presentation, September 2021
To underscore the significance of acquisitions in Reckitt's strategy, it's worth noting that the net book value of acquired brands as of 31 December 2022, stands at £14.1 billion or 49% of total assets.
Past capital allocation decisions have had a detrimental impact on Reckitt's stock performance, resulting in a modest 1% stock appreciation over the last five years, compared to the S&P 500 55% gain during the same period. However, with a renewed management team in place and a sharpened focus on core brands, Reckitt is poised to embark on a potential turnaround journey.
Source: Koyfin (affiliate link with a 15% discount for StockOpine readers)
Global presence
Historically, the Company reported revenues categorized by geography, primarily consisting of the UK, US, and All Other Countries (ROW). As of FY22, US contributed 32% of the total revenue, the UK accounted for 5%, and the All Other Countries comprised a significant majority at 63%.
Over the period FY13 to FY22, US had the highest growth reporting 5.8% CAGR, while ROW and UK had a CAGR of 3.6% and 1.6%, respectively.
Source: Koyfin (affiliate link with a 15% discount), StockOpine analysis
The volatility depicted in geographic revenues was influenced among others by the following factors:
2017: The acquisition of Mead Johnson Nutrition significantly increased revenues from "All Other Countries", as Mead Johnson had a substantial presence in Asia.
2020: Heightened demand for disinfectant products during the COVID-19 pandemic drove strong performance in the US market. Brands like Lysol and Dettol experienced exceptional growth, with combined revenue exceeding £3B in 2022.
2021: The sale of Infant Formula and Child Nutrition ("IFCN") business in China negatively impacted ROW revenues.
2022: Reckitt Benckiser gained market share in the nutrition segment in the US following a product recall by Abbott, contributing to revenue growth.
In 2023, the Company changed its reporting to North America, Europe/AZN and Developing Markets with revenues evenly distributed showcasing a well-diversified geographic reach.
Segments
The Company operates under three reporting segments, namely, Hygiene, Health and Nutrition accounting for 41%, 42% and 17% of net 2022 sales, respectively.
Source: Reckitt Benckiser Annual Report 2022
Hygiene
Segment Overview
With £6.1B in revenues as of the latest twelve months ending (LTM) June 2023, brands in the Hygiene segment are broken into 6 core categories; Surface & Disinfection, Auto Dishwashing, Air Care, Fabric Additives, Lavatory Care and Pest Control. These core categories collectively contribute to over 80% of the segment's revenues.
Among the core categories, Surface & Disinfection, Auto Dish, and Air Care are the largest, each generating annual sales exceeding £1 billion. Fabric Care, Lavatory Care, and Pest Control, while smaller in comparison, each contribute between one-quarter of a billion and three-quarters of a billion GBP in retail sales.
The current standout performers in the segment include Finish (Auto Dish) and Harpic (Lavatory Care), both achieving double-digit growth in H1 2023. Harpic's remarkable success is particularly notable in India, where it has been present for over 30 years and now claims to have 78% market share.
Leading brands
Each of the revenue categories include some of the world's most trusted and recognized brands, such as Lysol in Surface & Disinfection, Finish in Auto Dishwashing, Air Wick in Air Care, Vanish in Fabric Additives, and Harpic in Lavatory Care.
Lysol is the largest disinfecting brand in the world (and the number 2 most trusted brand in the US, per Morning Consult), followed by Dettol, another RB brand which is reported under the Health segment. Finish is the leading auto dish brand globally while in air care RB claims to hold number one or two positions in over 80% of the markets in which it operates. Here is a detailed breakdown of market shares and brand position in each market.
Source: Investor Day Seminar Presentation, September 2021
Growth Opportunities
The Auto Dish category stands out as the largest with a significant growth potential, given that the global dishwashing machine penetration remains below 15%. Several markets, including Brazil, India, and China, exhibit penetration rates lower than 2%, presenting substantial opportunities for expansion.
Financial Performance
Source: Reckitt Benckiser Annual Reports and Earnings Releases, StockOpine Analysis
The Hygiene Global Business Unit (GBU) accounts for approximately 41% of the Company's total revenues. Over the years FY19 to FY22, Hygiene revenues grew at a CAGR of 5.8% while on a like-for-like (LFL) basis, revenues grew at a CAGR of 7.6%. It’s worth noting that reported figures are negatively impacted by foreign exchange. Going forward management’s medium-term target for the GBU is to maintain steady revenue growth in the mid-single digits, targeting a range of 4-5%.
The fiscal years 2020 and 2021 were marked by robust revenue growth driven by heightened demand for disinfectant products, notably Lysol, in response to the COVID-19 pandemic. Lysol, in particular, experienced extraordinary growth, surging by 70%. The decline in revenue growth in FY22 was primarily driven by the normalization of Lysol sales, which contracted by 25%. It's worth noting that despite this decline, Lysol's FY22 revenues remained 45% higher than in 2019. Excluding Lysol, the rest of the Hygiene segment achieved a growth of 5.1% in FY22, aligning with the medium-term targets. Encouragingly, Lysol returned to growth in Q2'2023, registering a high single digit net revenue growth.
The downward trend observed in the adjusted operating margin in FY22 can be attributed to several factors; which include the inflationary impact on the cost of goods sold, volume deleveraging associated with Lysol, and increased Brand Equity Investments (BEI), i.e. marketing expenses, in the segment.
Health
Segment Overview
Reckitt Benckiser's Health segment is a substantial contributor to the Company's results, accounting for approximately 42% (or £6.3B) of the LTM total revenues ending in June 2023.