EUR 850.00 For Business Accounts Only

Morningstar | Another Disappointment for RB Investors as Operational Mis-step Drives 3Q Miss. See Updated Analyst Note from 30 Oct 2018

RB missed our forecasts on organic growth in the third quarter due to an event that management described as a “technical issue” at an infant formula plant. This overshadows what was otherwise a fairly strong quarter, with an above-par performance at the hygiene and home division. Despite the miss, management reiterated guidance for the full year, which implies organic growth of at least 3% in the fourth quarter. We have slightly lowered our short-term assumptions to account for the disruption, but this has an immaterial impact on our GBP 73 fair value estimate, and we are reiterating our wide moat rating. After several execution issues over the last two years, RB is now on a yellow card, and must avoid further mis-steps to regain investors’ trust.

This should have been a strong quarter for RB, with the company cycling the negative impact of the cyber attack a year ago. However, like-for-like sales growth slipped to just 2% in the third quarter, undershooting our forecast of 3% for the second half of the year. The IFCN segment was entirely to blame, with like-for-like sales down 6% in the quarter, a huge disappointment following the second-quarter recovery that had fueled a rebound in the stock. Management said that a supply chain disruption in the Netherlands formula manufacturing facility that supplies Europe and Asia led to GBP 70 million in lost sales. Taking them at their word, without that event, divisional like-for-like sales would have been up 4%; not brilliant, but surely good enough to assuage the concerns of those investors that remain somewhat skeptical of the Mead Johnson acquisition.

Elsewhere, the business performed quite well. Like-for-like growth in hygiene and home of 4% was modestly above our forecast for the quarter and for the medium term. This is very pleasing because we believe that RB is likely to dispose of this business in the medium term, and reigniting sales growth will help it optimize the valuation multiple it realizes.

However, the big news from the quarter was undoubtedly the supply chain disruption, and a question mark now hangs over RB’s strategy. Management stressed that the event was not related to cost savings at Mead Johnson, and without giving details of the nature of the event, stated that it would have occurred under the previous ownership. RB has become prone to operational mis-steps over the last few years, and investors can be forgiven for wondering whether cost-cutting at RB has begun to cut into the muscle. Given that we do not believe the deal was about cost savings in the first place, however, and management made a modest initial estimate of GBP 200 million in synergies, we believe investors should give them the benefit of the doubt. The first step in management restoring its credibility would be to meet the retained guidance for the year, which implies a sequential improvement in the fourth quarter. Beyond that, we believe it is imperative that RB enjoys an extended period of strong execution.