Reckitt Benckiser Shares Still Undervalued

Morningstar equity analysts are lowering their share price forecast for the consumer goods giant, but believe that the shares are still below their fair value

Philip Gorham 24 April, 2018 | 3:08PM

Reckitt Benckiser - Finish Tablets

Morningstar equity analysts have lowered their fair value estimate for consumer goods firm Reckitt Benckiser (RB) following a fairly soft first-quarter trading update.

RB appears unlikely to rebound to its normalised organic growth rate this year as we had hoped, so we are lowering our fair value estimate to £73 a share from £74. Our longer-term thesis is intact, however, and we think the portfolio repositioning has created a business with a strong competitive advantage – or wide moat – with price/mix that should support above-industry-average growth in the medium term.

We believe the shares offer an attractive discount to our fair value estimate – they are currently trading around £54 – and that faster growth in baby formula and consumer health would be the catalyst to trigger the upside. The shares are rated five-star by Morningstar analysts, which mean they are significantly undervalued.

Overall like-for-like sales growth of 2% was in line with the fourth quarter, but still slightly disappointing, given the business' significant underperformance last year. Even allowing for a rebound in the second half of this year as RB puts a 2017 cyberattack behind it, it appears that we were previously slightly too aggressive on near-term growth. To our surprise, the reason given for the first-quarter stagnation was a "significant decline" in the Scholl foot products brand, which shaved 200 basis points from 1% growth in the health portfolio.

The performance at Scholl was somewhat surprising, given that the business has now overcome the difficult comparisons from strong innovation two years ago. The implication from the continued struggles at Scholl is that the category as a whole has lost shelf space as retailers have reacted to failed innovation over the past year or so by pulling gadgets from the shelf. While it is unlikely that shelf space will be recovered in the near term, we expect foot care to stabilise and the health segment to grow at a rate a touch over 4% in the medium term.

The key drivers of our valuation of RB are the organic sales growth rate and profitability. We believe both the infant formula and consumer health categories possess strong pricing, and when RB’s portfolio repositioning to increase exposure to these businesses is complete, we believe the firm will have a stronger price/mix growth than most of its competitors.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Reckitt Benckiser Group PLC6,583.00 GBX-0.90

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Philip Gorham  

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