Reckitt gives weak scrub to valuation stain
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Karen Kwok
LONDON, July 24 (Reuters Breakingviews) -Reckitt Benckiser RKT.L CEO Kris Licht is giving his firm’s valuation stain a gentle scrub. The 31 billion pound Durex maker is selling some of its home cleaning brands and may exit its baby milk division, which is facing legal woes in the United States. The problem is it’s unclear when Reckitt can sell them, and when investors can leave the infant formula litigation problems behind.
Reckitt has had a rocky year so far. Shareholders have wiped 5 billion pounds off its market value since March, when an Illinois court awarded $60 million in damages to a mother whose child died after consuming Mead Johnson formula milk. The worries are there are more legal hits to come, potentially reaching 2 billion pounds, Bernstein estimates. Inflation is also making it harder for Reckitt to pass on costs to consumers, damaging sales growth. The London-listed group’s shares have fallen 18% so far this year.
As a result Licht is cleaning house. He will sell slow-growing hygiene brands like mould remover Cillit Bang, and is pledging to get out of the nutrition business, which mostly comprises the baby milk maker Mead Johnson. That should highlight the hidden value in Reckitt.
Assume the hygiene castoffs fetch 2.5 times 2023 sales, as per Jefferies estimates, or 4.8 billion pounds. Next, put the rest of the hygiene business on a richer 4.8 times revenue multiple, in line with peers Procter & Gamble PG.N and Church & Dwight CHD.N, and it’s worth 20 billion pounds. Finally, the health unit, which makes Durex condoms, could be valued at 24 billion pounds using a 4 times sales multiple, the average of Haleon HLN.L and Johnson & Johnson JNJ.N. Add it up, and Reckitt might be worth 49 billion pounds including net debt, some 29% above its current enterprise value, even before factoring in the troubled baby milk division.
Yet investors don’t seem convinced. Reckitt shares barely moved on Wednesday morning after the breakup was announced. The lack of clarity on timing is one issue. So far, Licht has not yet given a date for when the baby unit will be sold, raising the risk of higher than expected losses as cases come to trial next year. And the home care assets won’t be sold until the end of next year, and Reckitt hasn’t said whether it will return the money to shareholders or invest in the business. Licht’s fix for Reckitt goes in the right direction, but needs an extra polish.
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CONTEXT NEWS
British consumer goods group Reckitt Benckiser on July 24 said it would sell its home care brands, which include Air Wick and Cillit Bang, and said it was looking at all strategic options for Mead Johnson, which has recently faced litigation in the United States over an infant formula product.
Reckitt acquired U.S. baby formula maker Mead Johnson Nutrition for $16.6 billion in 2017, but is currently seeking to overturn a $60 million verdict in a lawsuit after a jury ordered the unit to pay the mother of a premature baby who died after being fed the Enfamil baby formula.
The British consumer goods company also lowered its full-year sales growth forecast for 2024 to 1%-3%, down from its previous forecast of a 2%-4% rise. Reckitt said it would launch a share buyback of up to 1 billion pounds and increase its interim dividend.
Reckitt shares rose 0.29% at 0907 GMT on July 24.
Editing by Neil Unmack and Oliver Taslic
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