Reckitt Benckiser has neither issued a trading update nor seen its shares go ex-dividend.
But it is one of the biggest fallers in the FTSE 100 after analysts at UBS slashed their rating on the Cillit Bang and pharmaceuticals group. Reckitt, which is considering a disposal of its drugs business best know for heroin treatment Suboxone, is down 51p at £48.14 as UBS moved from buy to sell. The bank said:
We believe Reckitt's current valuation implies a much greater valuation for the pharmaceutical division than is likely to be released if the management opts for disposal, and the risks to [the division's] profits after 2016 from the threat of a generic film buprenorphine are being overlooked.
We do not dispute the growth strategy employed by Reckitt for the core operations, and we assume the shift towards greater emerging market and healthcare exposure brings sustainable long-term sales growth – with Reckitt's scale and culture of innovation allowing it to outperform its local markets. We also assume its core businesses, which operate in strongly branded markets where price competition is less important, can maintain their above-average margins.
Management has noted its intent to further consolidate the over the counter healthcare category, including its recent entry into vitamins and supplements, and to further rebalance the business towards the faster-growing emerging markets. Cashflow is therefore likely to be used for acquisitions rather than boosting cash returns to shareholders, and any positive investment case is likely to assume that acquisitions will create value.
Reckitt's average adjusted earnings per share growth was 17% per annum in 2008-12, with organic earnings per share growth around 10% per annum. By contrast, we estimate 1.5% average adjusted earnings growth over 2013-15. The main drivers of the expected deceleration are lower profits at pharmaceuticals, higher interest charges and negative currency translation.
