Reckitt Benckiser’s shares have suffered from investors’ cold feet this year, falling from £64 to £58 in a couple of weeks after it became clear that the Omicron variant of Covid was not going to be as bad as feared. The shares have been buffeted around ever since the pandemic struck, as the stock market tried to assess how the company was going to be affected by each new chapter.
The key figure for Reckitt is 80 — the percentage of people who say they will maintain current levels of personal and household hygiene post-pandemic. That is only a few points down on the figure thrown up by surveys a year ago and, while it can be expected to shrink gradually, its resilience is vital for the company’s immediate prospects.
Yesterday the group announced net revenue for 2021 up 3.5 per cent at £13.2 billion. There was an operating loss of £804 million, thanks to the sale of its troubled Infant Formula and Child Nutrition (IFCN) business in China. A better measure is adjusted operating profit, which was £2.9 billion compared with £3.2 billion in 2020. Nevertheless, the shares were one of the day’s best performers in the FTSE 100, up 290p, or 5 per cent, at £60.97, as analysts focused on the underlying performance and prospects.
Last year was mixed. Its hygiene division was far and away the best performer, with sales up 7.5 per cent as people tackled the pandemic with liberal applications of Ajax, Dettol and Lysol. Health revenue, covering a range of products from Strepsil and Lemsip to Durex, was down 0.1 per cent, and nutrition up 0.6 per cent.
Laxman Narasimhan, chief executive, was keen to emphasise that 70 per cent of the group’s brands were “less sensitive” to Covid, and can be expected to suffer less from the pandemic’s retreat. He expects about 5 per cent sales growth from these to be the main engine for expected revenue growth of between 1 per cent and 4 per cent this year.
Advertisement
The big test is how willing Reckitt’s customers will be to absorb some pretty high price increases. Cost inflation for its raw materials was 11 per cent last year, and Narasimhan expects that to creep into the teens this year. Higher prices, rather than volume growth, were the saving grace in 2021. Can the group repeat the trick? That is not simple, as Reckitt’s immediate customers are supermarkets — and they are used to driving hard bargains with suppliers. The broker AJ Bell is among those who harbour doubts.
The management has been developing new brands, expanding existing ones around the world and introducing more variations, such as the plant-based Dettol Tru Clean.
Narasimhan said: “Our innovation pipeline is 50 per cent larger, our brands are stronger and more relevant, and our ability to serve our customers and consumers is greatly improved. We’ve also been active in managing our portfolio, repositioning for faster growth.”
He was able to claim that 62 per cent of its “category market units” are holding or raising market share, offering the prospect of higher like-for-like net revenues and adjusted operating margins this year. Online offers scope for increasing its share of sales from 12 per cent to about 25 per cent by 2025. He may also unload a few unwanted operations, such as ICFN outside China.
Reckitt deals in solid, low-growth consumer goods. It should be the backbone of many portfolios and has an experienced board attuned to the chances offered by new technology.
Advertisement
Earnings in 2022 may struggle to reach 20 times the share price, and a 2.9 per cent dividend yield may be enough for now.
ADVICE Hold
WHY Fair value, with the possibility of share price growth if Reckitt’s management succeeds in its ambitious goals
Moneysupermarket Group
The stock market has had doubts about Moneysupermarket since mid-2019, when the shares hit their record high of 420p. The question for investors is whether they have now bottomed out at 190p.
Lockdown reduced the incentive to compare prices, and the energy crisis rendered its services in that area redundant until something more like normal service resumes.
Group revenue for 2021 fell 8 per cent, from £344.9 million to £316.7 million. Adjusted ebitda (earnings before interest, tax, depreciation and amortisation) was 7 per cent lower, at £100.5 million against 2020’s £107.8 million. That was an improvement on analysts’ recent expectations of £96.5 million. In the final quarter the standout problem was home services, where revenue was down a whopping 64 per cent to £8.8 million, but travel leapt 184 per cent to £1.6 million as Covid restrictions eased.
Peter Duffy, chief executive, expects no energy revenue this year but is still shooting for ebitda to be at a similar level this year. “We remain confident that the energy switching market will return strongly in the medium term,” he said.
Advertisement
More important is what Duffy can do to squeeze more from Moneysupermarket’s customer goodwill. Last year he bought Quidco, a cashback provider, to complement MoneySavingExpert in the growing range of the group’s proactive services. He has clearly been doing plenty of plumbing, streamlining the processing and subsequent use of data streams flowing through the business daily. Top priority is to boost cross-selling from 19 per cent to 40 per cent in time. More add-ons are on the cards.
The shares’ price-to-earnings ratio on 2021 earnings is a fair 16, while the dividend has been maintained and should grow. The 6.1 per cent yield is more appropriate for a business with far less potential.
Last October, Tempus rated the shares a buy at 212p, but the market judged that the balance of bad news and good prospects was still tilted to the negative. The better-than-expected full-year results, and more insights into the management’s plans, suggest the balance is moving in the right direction.
ADVICE Buy
WHY The bad news is in the share price, but as yet the good news is not
