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Reckitt shares get warm welcome from analysts, but RBC says they're overvalued

All analysts covering the stock hiked their price target for the Dettol-to-Durex manufacturer

Reckitt Benckiser -

Reckitt Benckiser PLC (LON:RB.) got a very warm welcome from City analysts after its strong first half results.

Share price targets were raised by all the analyst covering the stock as the consumer goods giant closed the previous day at 7,800p, with the highest being Barclays upping to 9,400p from 9,000p and keeping its ‘overweight’ rating, the same rating as JPMorgan Cazenove, which hiked to 9,000p from 8,000p. 

Berenberg and UBS, which both have ‘buy’ ratings on the stock, respectively lifted their targets to 9,000p and to 8,600p, from 8,000p and 8,400p. 

Jefferies kept its ‘hold’ recommendation but upped its target to 7,100p from 6,600p, while Credit Suisse stayed at ‘neutral’ but lifted its TP to 7,200p from 7,000p. 

Naysayer RBC Capital Markets persisted with its ‘underperform’ rating but hiked its target to 6,400p from 6,300p.

Interim results from RB showed 10.5% like-for-like sales growth in the second quarter, a considerable beat to the consensus forecast of 7.8%, driven by a 650 basis point beat from the Hygiene segment and 830bps in Other Health. 

First-half underlying profit (EBIT) margin increased by 90bps to 24.5%, 195bps above the consensus.

Management said they plan to reinvest an additional £200mln in the business above the original rejuvenation plan, with the expanded investment plan including support for new and additional opportunities such as increased demand for disinfectants, the acceleration of e-commerce and further development of the new professional services unit.

The sceptical analysts at RBC acknowledged that Reckitt's operational capacity and culture are improving but still feel the share price is over-valued in the medium term.

“As current tail winds moderate, notwithstanding a long term improvement in some hygiene categories' growth, we expect the shares' over-valuation will become more evident,” was the crux of RBC’s argument. 

More positive UBS analysts said the “strong H1 beat and conservative guidance leave ample scope for further positive earnings surprises”.

Those at Berenberg were of a similar mind, saying management’s estimate of a 5-6% COVID-19 headwind to 2021 LFL sales growth, “will leave room for further LFL sales growth upgrades over the next 12-18 months”.

The Berenberg analysts were “pleasantly surprised” by management's disclosure of a 2020 outlook for high single-digit sales growth and adjusted EBIT margins of 23.5%, “which suggests increased confidence and visibility to the year end”. 

“In our view,” they added, “these latest results confirm management remains highly focused on improving LFL sales growth through improved agility and execution. 

“The reinvestment of an additional £200m versus the original plan (while maintaining EBIT margin guidance for 2021 and beyond) makes the investment case even more compelling, in our view.”

RB’s share price valuation is “not undemanding”, Berenberg said, but continues to trade at a 10% discount to other stocks in the home and personal care sector and in line with its five-year average discount. 

Berenberg said at price target, RB would trade at 25.9 times 2022 forecast earnings per share, versus the subsector average of 25.1 times, “which, in our view, is justified by the company's improving growth profile”.

Quick facts: Reckitt Benckiser

Price: 7460 GBX

LSE:RB.
Market: LSE
Market Cap: £53.07 billion
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