Reckitt Benckiser shares boosted by outperformance

Shares in Reckitt Benckiser (RB.) moved higher as markets responded to its announcement that it had exceeded full-year targets for 2011 and posted a strategy to continue outperformance into 2012.

Total net revenue growth at the company, which owns the Dettol and Nurofen brands, rose 13%, exceeding the prior target of 12%.

Operating profit was up 11% to £2.5 billion with the adjusted operating margin declining by 20 basis points to 26.2% as RBP, the pharmaceuticals branch of the company, struggled to match the performance of other divisions within the group.

SSL, acquired by Reckitt Benckiser, also had a positive first year, with net revenues growing 6% like-for-like to £843 million, although full-year growth was softer at 4% after a quiet fourth quarter. Cost synergies from the acquisition of SSL of £85 million exceeded the £50 million target for the full year, due to savings being achieved earlier than expected.

The group emphasised its brand power in both the health and hygiene market as part of its new outperformance strategy designed to direct decisions over the next decade. The brand focus has already begun to play into decisions with total marketing investment higher in 2011. Media investment rose 9% for the year, accounting for 10.4% of net revenue.

"Growth was driven in particular by excellent growth in emerging markets, and growth in our Powerbrands - Dettol, Nurofen, Mucinex, Strepsils, Gaviscon and Harpic," said Rakesh Kapoor, chief executive officer.

Increased investment in brand building forms a core part of the company's strategy in targeting annual cost savings to fuel additional investment of £100 million into brand equity building. "In addition to our highly successful 'Powerbrand' strategy, we have identified 16 'Powermarkets' for increased focus and investment, most of which are in emerging markets," Kapoor continued.

Analyst view

"Reckitt's [2011] results are in line with consensus and our own expectations, with margin in the developed markets being modestly disappointing, and emerging markets better," said Eddy Hargreaves, analyst at Collins Stewart. "The outline strategic review appears distinctly underwhelming, with no clear top-line acceleration in prospect."

However he was sceptical over the group's ability to achieve the ambitious targets it has set. Over the next five years the company aims to shift its emerging market weighting within the core business from 42% to 50%. Hargreaves was not convinced by the targets. "Given that emerging market margins are currently 17% compared with developed markets at 25%, this looks a significant stretch to us.

"We remain sellers of Reckitt, and feel that the strategic review, while sensible... suggests that the new Reckitt will be a lower growth company, operating in increasingly mature categories and with the prospect of the 25% of profit from pharma being eroded over the next one to two years," he added.

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