EUR 850.00 For Business Accounts Only

Morningstar | In Line 4Q for RB; Shares Undervalued but Margin Pressure May Be Sustained This Year

Reckitt Benckiser posted modest upside to our estimates in fourth-quarter 2018, with recovering like-for-like sales growth and solid operating income growth. Management guided to 3% to 4% like-for-like sales growth in 2019, in line with our forecasts, and we are maintaining our GBP 73 fair value estimate and wide moat rating. We see upside to the stock from current levels, and we think the strategy to reposition RB into a consumer health business will strengthen the business for the long run.

Fourth-quarter like-for-like sales growth of 4% was modestly above our estimate, with upside in North America and developing markets more than offsetting downside in Europe/ANZ. By category, the infant formula business drove growth, up 5% on a like-for-like basis in the fourth quarter. This is consistent with our thesis that the Mead Johnson acquisition will drive long-term growth, boosted by price/mix. It was pleasing in this quarter, however, that other parts of the business were also robust. The hygiene home segment grew sales 4% on a like-for-like basis, and if growth of this level is sustained, it could help maximize the valuation achieved if RB looks to offload the business in the next couple of years.

RB was slightly weaker than our forecasts at the operating margin, however. The full-year adjusted operating margin of 26.7% was down 60 basis points, and driven by a decline in the health business margin of 130 basis points. Pressure at the gross margin (down 40 basis points) was the primary culprit, as RB struggled to pass through cost inflation, which is likely to be sustained this year. We believe the companies that will be best positioned to pass through that pressure are those with the highest gross margins and those with pricing power. These results shows that RB is not immune from inflationary pressures, but we think the pricing power inherent in the consumer health business makes it relatively well-placed to absorb cost inflation in the medium to long term.