Reckitt Benckiser (RB.L)
Growth injection – upgrading to OW
Supercharge compresses growth into the equity story and powers sales and EBIT, while the strategic optionality in Consumer Health could drive a step-change in RB's growth. With one of the best risk-rewards in Staples, we move OW.
What's Changed?
Risk-reward appeal, top pick in HPC: The launch of the Supercharge cost saving program and the strategic optionality we see give Reckitt Benckiser (RB) one of the most attractive risk-rewards in the sector, in our opinion. We are now more confident about Supercharge's delivery and raise our EPS estimates by ~3-4% from 2015, which takes 2015-17 CAGR to 8%+ and puts us ~5% ahead of consensus in 2015-16. In this report we examine hypothetical portfolio changes that RB could make, which we capture in our Bull case.
Supercharge – an engine of sales and EBIT growth to 2017. The market underestimates the potential for Supercharge to drive both top-line and EBIT growth from 2015, we argue. The program's focus on new sources of efficiency gains in SG&A gives us confidence that RB can deliver the targeted savings from 2015, driving superior EBIT margin progression. We expect the organisational streamlining that Supercharge entails to boost top-line growth (~5% ongoing) as RB better leverages scale with larger, more rapid innovation.
Strategic optionality – reshaping the portfolio towards Health. RB's shift towards Consumer Health has the potential to generate a step-change in its growth and margin profile, making it a standout growth story in Staples and returning it to the premium it used to enjoy when growing at the top end of its peer group (our Bull case of 7,400p). A scenario we examine here is if RB were to extend the process of portfolio reshaping to include the disposal of all or part of its Home division. In such a case, we think the total value could be £4.7-5.4 billion. If this were accompanied by acquisitions of £5bn in Consumer Health, it could take group structural growth from ~5% to 6-7%, with low teens EPS growth, our analysis suggests.
Attractive entry point, re-rating potential: With the HPC sector having seen a significant re-rating, RB's recent relative underperformance creates an attractive entry point ahead of strong earnings delivery in 2015 and 2016, we think. At ~23x 2015e PE, valuation is at the upper-end of its historical range but upside earnings surprises should drive upside.