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Questor: Avoid Reckitt Benckiser, with suspicions the best years are behind it
Twentieth anniversaries are in vogue. Jeremy Corbyn is talking up his chances of returning Labour to power two decades after Tony Blair entered Downing Street. The Bank of England has been busy defending its switch to independence in 1997 amid mutterings that the Treasury should take a bigger role in monitoring financial stability and policy.
In contrast, over at Reckitt Benckiser there has been barely a murmur as Adrian Bellamy reaches the big 2-0 as a board member of the Nurofen maker and its predecessor company. That’s because it is a milestone that non-executives are never meant to reach. Bellamy, the 75-year-old former Body Shop chairman, has chaired Reckitt for 14 years and his overall involvement is more than twice the length that the corporate governance brigade advocates as best practice. Given one of its brands is stain remover Vanish, you would think he would have taken the hint before now, only recently announcing a hand over next May to Mattel chairman Christopher Sinclair.
It is impossible to ignore Reckitt’s emergence as a £50bn health and hygiene superpower in the time that Bellamy has been in the boardroom. From the merger that created the business in 1999, to blockbuster acquisitions that added Strepsils and Durex condoms to its bathroom cabinet, shareholders have reaped giant rewards. So has the management.
Bellamy waved through the breathtaking £92m annual package for former chief executive Bart Becht – a sum that even Sir Martin Sorrell has yet to beat.
But as the old guard takes its leave, there is a suspicion that Reckitt’s best years could be behind it. Sentiment has changed faster than Cillit Bang – another Reckitt brand – eats limescale. From a June high, its shares have dropped 16pc, underperforming peers by some margin.
There have been slips, notably the launch of a Scholl foot file that flopped because it was too expensive. That came as a shock given Reckitt’s expertise in developing new products and brand extensions backed by generous marketing budgets. The company is also suffering a boycott in South Korea where it admitted selling a humidifier disinfectant that killed 96 people. In addition, Reckitt’s markets, particularly healthcare, have been tougher. Higher commodity costs have held gross margins flat. A third-quarter trading update on Oct 18 will be closely watched.
In July, Reckitt reined in like-for-like sales guidance this year from 3pc to 2pc, blaming a cyber attack that hit manufacturing and distribution. Analysts think even meeting this target will be a stretch. Morgan Stanley has pencilled in 1pc growth for the third quarter, leaving a heroic plus-7pc required in the final three months of the financial year. The prevailing mood is that there is another downgrade on the cards. Yet the biggest worry is the performance and integration of Mead Johnson, the baby formula maker acquired for $17bn (£13bn) in February. It was viewed as an odd departure by a business desperate to get its top line going again.
Some said the acquisition would have fitted better at Nestle. Analysts at RBC don’t think the deal works “strategically, operationally or financially” and reduced their already downbeat assumptions for Mead after gloomy interim figures. They worry that because of its size it comes with a higher level of risk than any previous takeover.
The alternative view is that Mead, whose addition makes China Reckitt’s second-largest market after the United States, will be the source of some upside just when the group needs it. The forecast £200m in cost savings looks light given Reckitt’s previous performance with takeovers, Morgan Stanley says. It points out that £200m is 6.8pc of Mead’s sales when the company has managed in the past to squeeze out around 16pc from acquisitions. The promise of a bigger savings number later this month might sweeten poor trading figures. And if Reckitt gets it right again, it will be powering ahead once more a couple of years from now.
It is a close call. Much of the current weakness has been priced in as the shares derated over summer. Yet Reckitt feels like a business struggling for stability: witness the clear out of several of its senior managers.
Trading at 18 times next year’s forecast earnings, Reckitt has long-term potential but this is not the right time to buy. Avoid for now.
All our Questor tips: telegraph.co.uk/questor