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THIRD QUARTER 2010<br />
Reckitt Benckiser<br />
Respect the Cincinatti Kid<br />
Reckitt Benckiser is currently under attack on a number of fronts.<br />
P&G is trying to make inroads in to stain removers and auto dish and<br />
we believe air care will be next. Perrigo should get FDA approval for<br />
store brand Mucinex imminently and surface care is now lapping<br />
some very difficult swine flu related comparisons. At the same time<br />
RB’s rate of media investment appears to be lagging behind peers.<br />
P&G ups the ante…..<br />
P&G is focusing its firepower at a number of RB’s key categories right now. P&G’s<br />
new stain removal brand Tide/Ariel Acitilift has already been launched in 20+<br />
markets and is due to launch in the key UK market on July 5 th . At the same time the<br />
latest Fairy auto dishwash variant is being rolled out through Europe and we feel<br />
sure that the AmbiPur aircare acquisition will be marked by a strong H2 roll-out<br />
programme – if anyone is any doubt we refer you to the latest presentations on the<br />
P&G website. This competitive activity should ensure that the promotional pressure<br />
evident in the last few quarters is at least maintained at similar levels.<br />
…..and comps get more difficult elsewhere<br />
As we look into Q3, the comps in surface care - another of RB’s key categories -<br />
also get more difficult as we begin to lap last year’s swine flu pandemic panic. Sure<br />
the headline numbers are supported by a few more quarters of Suboxone but<br />
these incremental revenues have very limited impact on Enterprise value. We have<br />
already inverted our Suboxone timings and now assume that we will have a<br />
competitor launch to Suboxonne at some stage in H2 which will reduce revenues<br />
by 30% this year and another 70% next year. The exact timing of this is still<br />
unclear, however the FDA action in fast tracking Vivitrol indicates that these 2011<br />
forecasts may yet prove too conservative – we will hear more on Vivitrol on<br />
September 16 th .<br />
Wake me up before you Perrigo<br />
Perrigo currently have an ANDA pending with the FDA for a 600mg Guaifenesin<br />
extended release tablet which is basically a generic version of RB’s Mucinex tablet.<br />
We anticipate that FDA approval is fairly imminent now that Perrigo has been<br />
granted a favourable judgement in the patent litigation case with Adams (now RB).<br />
We reckon Adams revenues are around £320m or rougly 5% of group sales. In May,<br />
Perrigo acquired the generic rights for Delysm, another RB cough/cold medication<br />
which is a further indication of their ambitions in this category. As a case study it is<br />
worth noting that when Perrigo launched Omeprazole as a generic store brand<br />
version of Procter and Gamble’s market leading heartburn medicine Prilosec in<br />
2008, it captured 35% of the market within 4 months. A similar result in the cough<br />
cold category would depress RB’s group revenue by 1.5%<br />
Valuation no great support<br />
We have no desire to join the graveyard of other analysts who have prematurely<br />
predicted the demise of Reckitt Benckiser. We are certainly NOT predicting<br />
anything so drastic, however, we feel there are enough headwinds right now to put<br />
the model under greater pressure than it has hitherto endured. Against this, the<br />
valuation is rich as ever with RB currently trading at a PE multiple of some 16.5<br />
times 2011. This stands at a marked premium to Unilever (14.4x), Nestle (14.7x), ABI<br />
(12.5x), and more importantly P&G (14.0x), Colgate (14.8x) and Clorox (12.9x). Nor<br />
can the group rely on its cash flow any more as a 6.6% free cash flow yield is also<br />
in line with sector averages. By the time of the Q2 results (July 26) RB will have net<br />
cash on the balance sheet. Clearly any acquisition priced below say 30 times would<br />
be usefully earnings enhancing – albeit with a questionable IRR - and this is clearly<br />
the risk to our thesis of earnings losing momentum. We continue to believe any<br />
move on a share buy-back would not be taken positively.<br />
http://www.execution-noble.com<br />
SELL<br />
2% downside<br />
Fair Value £30.69<br />
RIC, Bloomberg Code RB.L, RB/ LN<br />
Share Price £31.32<br />
Market Capitalisation £22,807m<br />
Free Float 85%<br />
£m (unless stated) 2009 2010E 2011E 2012E<br />
Sales 7,753 8,188 8,239 8,590<br />
Ebitda 2,070 2,048 1,938 2,003<br />
EPS (£) 1.95 1.99 1.90 1.97<br />
Dividend (£) 1.00 1.13 1.27 1.39<br />
FCF 1,841 1,571 1,508 1,571<br />
Invested Capital 5,189 5,059 4,919 4,774<br />
Net Debt -220 -1,016 -1,653 -2,256<br />
X (unless stated) 2009 2010E 2011E 2012E<br />
EV/Sales 2.8 2.7 2.6 2.5<br />
EV/Ebitda 10.5 10.6 11.2 10.9<br />
PE 16.1 15.7 16.5 15.9<br />
Dividend Yield (%) 3.2 3.6 4.0 4.4<br />
FCF Yield (%) 8.1 6.9 6.6 6.9<br />
ROIC (%) 26.5 28.1 26.8 28.1<br />
Net Debt/Ebitda -0.11 -0.50 -0.85 -1.13<br />
Analysts<br />
Martin Dolan<br />
+44 20 7456 1674<br />
martin.dolan@execution-noble.com<br />
James Edwardes Jones<br />
+44 20 7456 1697<br />
james.ej@execution-noble.com<br />
Ved Vyas<br />
+44 20 7426 4262<br />
ved.vyas@execution-noble.com<br />
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