EQUITY RESEARCH. Reckitt Benckiser, French s Food business sold. Share Price: 7,936p Target Price: 8,000p* (+1%) 19 July 2017

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1 Reckitt Benckiser, French s Food business sold Share Price: 7,936p Target Price: 8,000p* (+1%) Reckitt Benckiser (RB) has announced the sale of its French s Food business for US$ 4.2bn, which is ahead of market expectations and represents a high sale multiple of 20x FY-16 s EBITDA. We are comforted by this transaction since it will reduce RB s debt profile to a more manageable level, allowing it to focus upon integrating of recently acquired Mead Johnson business. Overall this transaction progresses RB s strategy of becoming a global leader in the consumer health and hygiene market and as such, justifies to a higher degree, its top quartile valuation. We thus upgrade our recommendation to Hold (Sell) with a new, temporary target price of 8,000p*. *Temporary target price ahead of interim results expected on 24 July. Reckitt Benckiser (RB) has an enviable long-term track record of business success, delivering organic revenue growth, positive cash generation and successful M&A transactions, which has justified its top quartile valuation rating over this period. This latest transaction exemplifies RB s top quartile business credentials, with the French s Food business being sold to McCormick & Company on high multiples of 7.4x historic sales and 20x historic EBITDA. Proceeds will be used to pay down debt, which is prudent. Recent Results, Weakest For A Decade. Despite RB s strong long-term growth record, recent organic growth rates have been disappointing with the last three-quarters growth rates being only +1%, 0% and 2% respectively which comes on top of Mead Johnson s most recently reported sales growth rate of -3% in Q4-16. The outlook for H2-17 is probably slightly better, but we wait for RB s Interim Results due on 24 July before possibly turning more positive on the share price outlook. Profile Code: A-4-5 Classification & Overview Objective: Growth and Income Company Details EPIC Code: RB.L Data NOS (m) & Free Float % Mkt Cap ( bn), Gearing (%) 57 21% Net Debt : EBITDA (x) 3.0 FY-18E 2 Year Beta 0.86 Ex-Div Date Next Results: H1-17 TBC 24-Jul-17 Source: Company Data, Consensus Data, Broker Forecasts Share Price History Risk Score: 5 Time Horizon: 12 Months Reckitt Benckiser PLC (RB.L) manufactures and distributes a wide range of Consumer products in the Health, Hygiene and Home categories on a global basis. It owns many well know brands, but focuses upon some 19 key brands which account for around 80% of total sales. Such brands include; Dettol, Nurofen, Vanish, Airwick and Durex. Valuation and Recommendation. RB has always justified a premium rating to its peers, due to its reliable growth model. With today s transaction, RB s forward EV/EBITDA multiple will ease lower (due to lower debt going forward). At around 17x, it is still very much top quartile ( as shown in the accompanying peer group valuation chart) but this is justified to a greater extent now. We therefor upgrade our recommendation to Hold ahead of the Interim results on 24 July, with temporary target price of 8,000p. Consensus Forecasts & Key Metrics Year to December: E 2018E Financials Revenue (bn) EBITDA (bn) EBITDA margin (%) 30.3% 29.1% 31.0% EPS ( ) DPS ( ) Valuation P/E EV/EBITDA DIV Yield (%) 1.9% 2.2% 2.4% Source: Company Historic Data, Consensus Data, Beaufort Estimates Source: LondonStockExchange.com RB Historic Revenue Split Source: Company Website Research Analyst Ben Maitland CFA UK Ben.Maitland@beaufortsecurities.com 1

2 Quarterly Growth Rate Summary, Slowdown Continues The tables below summarise the quarterly organic revenue growth performances for RB s reporting divisions, ENA (Europe and North America) which represented 65% of FY-16 sales, DvM (Developing Markets), 31% of FY-16 sales and Food, 4%. Clearly Q4-16 was a very weak quarter, and as we expected, the following two quarters have been weaker at 0% and 2% respectively. H2-17 could be stronger as last year s comparatives for this period are lower, Interim results due on 24 July will give us some guidance on the outlook. We also show our cash flow forecasts for RB below. Strengths Reckitt Benckiser has an enviable track record of sales growth, margin development and cash flow generation over the last 15 years. It is focused on three key Consumer categories, Health, Hygiene & Home. Through the Mead Johnson acquisition, RB now has a greater exposure to China and RMB cashflows. Weaknesses RB s organic sales growth rate has slowed very sharply during FY-16 and has continued into FY-17. The Mead Johnson acquisition business will take time to turn around, with no evidence likely until FY-19. RB is an expensive stock, so the downside risk from even mediocre performance could be significant. 2

3 H1-17 Interim Results Preview Reckitt Benckiser will report its H1-17 results on 24 July We look for revenues of around 5.2bn, which is 13% stronger than the same period last year, but all of this growth is due to the beneficial effect of weaker Sterling, RB s reporting currency. The underlying growth rate in revenues is likely to be around 1% over the period. RB recently reduced its full year organic revenue growth guidance from 3% to 2% which implies H2-17 s growth rate needs to be around 3-4%, which we think is too optimistic. We look for EBIT of 1.3bn, up around 30% on last year s adjusted figure of 1.08bn, driven by FX gains, new product launches and margin progression. Adjusted, diluted EPS for the period should be around 130p Consumer Sector Relative Valuation Chart The chart below summarises where RB sits in relation to its international FMCG peers. Post the acquisition of Mead Johnson which is now becoming factored into consensus forecasts, RB s EBITDA growth rate has improved (according the Bloomberg Consensus data), justifying to a certain degree, its high valuation Consumer Staples, Relative Value and Cash Flow Growth 17.0 RECKITT BENCKISE 16.0 KRAFT HEINZ CO/T 15.0 COLGATE-PALMOLIV UNILEVER PLC DIAGEO PLC BRIT AMER TOBACC R² = EV/EBITDA Rolling 12m 14.0 PROCTER & GAMBLE ASSOC BRIT FOODS 11.0 IMPERIAL BRANDS TATE & LYLE % 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% EBITDA 3-Year CAGR 3

4 Beaufort Profiling Code Reckitt Benckiser = A-4-5 LETTER CODES A Large market capital company e.g. FTSE 100 B Medium market capital company e.g. FTSE 250 C Small market capital company e.g. AIM NUMBER CODES 1st Recommendation (Scale 1 - to - 5) 1 Buy 2 Long Term Buy (core) 3 Speculative Buy 4 Hold 5 Sell 2nd Beaufort Risk level 1 - low risk ( Scale 1 -to - 10 ) 10 - high risk Key Contacts Head of Retail Broking Costas Constantinou +44 (0) Chief Investment Strategist Mike Franklin +44 (0) Head of Online Trading Matthew Giles +44 (0) Our Offices London: 63 St Mary Axe, London EC3A 8AA Bristol: Castlemead, Lower Castle Street, Bristol BS1 3AG Colwyn Bay: 15 Wynnstay Road, Colwyn Bay LL29 8NB Newcastle: Rotterdam House, 116 Quayside, Newcastle upon Tyne NE1 3DY Tel: +44 (0) Tel: +44 (0) Tel: +44 (0) Tel: +44 (0)

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