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Considering adding Reckitt Benckiser

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Re: Considering adding Reckitt Benckiser

#360343

Postby TheMotorcycleBoy » November 26th, 2020, 4:17 pm

They (RB.) sound like quite an exciting company actually.....they even have separate CGUs described for "Sexual Wellbeing" and "Brazillian Sexual Wellbeing".

I guess I need to get out more often. :roll:

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Re: Considering adding Reckitt Benckiser

#360359

Postby TheMotorcycleBoy » November 26th, 2020, 4:46 pm

I see they had some bad press in 2016/2017:

https://www.bbc.co.uk/news/world-asia-36185549

Reckitt Benckiser sold deadly sterilisers in South Korea

British-based firm Reckitt Benckiser has admitted for the first time selling a humidifier disinfectant that killed about 100 people in South Korea.
The head of its South Korean division was attacked by angry relatives as he apologised at a Seoul hotel.
Reckitt Benckiser is among several firms whose products are blamed for the deaths.
It has offered compensation to the families of those who died, as well as the hundreds more who were injured.
Reckitt Benckiser withdrew its product from the market after South Korean authorities suggested a link between chemicals to sterilise humidifiers and lung conditions in 2011.
"This is the first time we are accepting the fullest responsibility, and we are offering a complete and full apology. We were late, five years have passed," Ataur Safdar said.
He added that the company was setting up a multi-million dollar humanitarian fund for the victims and their families.
Many are said to be children or pregnant women.


The kind of excitement which they could have done without.

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Re: Considering adding Reckitt Benckiser

#360368

Postby simoan » November 26th, 2020, 5:04 pm

TheMotorcycleBoy wrote:
simoan wrote:
TheMotorcycleBoy wrote:So could anyone here comment on this, to confirm or deny, that adding RB. to a portfolio which already holds ULVR, GSK and JNJ, is bordering on pointless, were my main objective to add a cleaning products manufacturer onto that portfolio. That is, putting current concerns about the numbers temporarily to one side.

thanks Matt

I think you're looking at it wrongly. Why do you want to own a company with such a poor balance sheet? This is the Company Analysis board so you should at least consider the financials.I don't see the point of worrying about where it fits in your portfolio in that context. How much of the profit of RB. is cleaning products anyway? I have no idea but there's no point buying a company where you only get a small exposure to such products and large exposure to products that aren't. I suspect something like Clorox gives you more exposure to cleaning products and has a much stronger balance sheet and profitability metrics.

All the best, Si

Simon,

With all due respect, I like to tackle "Company Analysis" from several angles. Quantitative and qualitative. That said I'd like to consider i.e. analyse the other aspects of the firm, i.e. the brands, creditability of their board.

Anyway, what's the speil about Clorox? Where are they....what's their EPIC stock code?

Matt

The balance sheet is obviously something for me to consider, and I will at some stage. However, with 0.1% as being the UK's (and many others') base rate for the foreseeable, I'm not planning on stressing over it immensely. But TBF I've only filled in 2014-2016 of my sheet so far. I'm about to bung in 2017-2019

Honestly, only my Mum calls me Simon when I've done something wrong. Why can't you use the name I sign off with like everyone else? It may be my birthname but no-one ever uses it and I don't see what gives you the right to be any different. It's impolite. If you sign off Matt, why would I call you Matthew?

As for the rest of your post, I can't be [expletive deleted]. This is the Company Analysis board although I'm the only person that has offered any on this thread thus far. IIRC you were involved in getting this board up and running and now you don't feel you need to abide by the rules and do any analysis.

Si

TheMotorcycleBoy
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Re: Considering adding Reckitt Benckiser

#360411

Postby TheMotorcycleBoy » November 26th, 2020, 6:24 pm

Anyway I don't think I'll add RB. My concern isn't so much the balance sheet per se. Since comparing with another FTSE100 heavyweight e.g. RELX we can see RELX is much more significantly geared:


My problem is that the high gearing levels are clearly a result of a failed business decision i.e. the acquistion of Mead Johnson.

https://www.financierworldwide.com/reck ... 7_dsK6nz0o

Reckitt Benckiser agrees $16.6bn deal for Mead Johnson

Reckitt Benckiser announced that it is to acquire US baby formula manufacturer Mead Johnson in a deal worth $16.6bn.

According to a joint statement, Reckitt will pay $90 per share for the company, a 30 percent premium on Mead Johnson’s closing price on 1 February, the day before speculation around a potential deal began. The transaction also includes Mead Johnson’s outstanding net debt of $1.2bn; the total enterprise value of the deal is $17.9bn.

The parties expect the deal to close in the third quarter of 2017, pending shareholder approval and standard regulatory approvals. Mead Johnson’s board of directors has already ratified the deal. Reckitt will fund the acquisition through loans from its banks – Bank of America Merrill Lynch, Deutsche Bank and HSBC – and by selling bonds. Specifically, the company will take out a bridging loan of $8bn to cover the cash consideration and issue $9bn of new debt in the form of three- to five-year-term loans. The two companies have also noted that the deal will include a $480m break-fee if either company walks away, subject to certain conditions.

The deal for Mead Johnson will provide Reckitt with a timely boost in a number of key markets, including the US and Asia. The company’s second biggest market – China – will be significantly strengthened by the deal. Reckitt hopes to exploit changing consumer habits in China in light of the country’s decision to scrap its one child policy. In 2016, China’s birth rate was its highest in years, rising nearly 8 percent on 2015.

According to Reckitt, the deal will lift earnings per share by a double-digit percentage within three years, while generating annual cost savings of around $250m.


However, continuing the comparison with REL, another firm which does a lot of acquiring, and has substantial leverage, we can see that RB. has failed to pull it's massive investment in Mead Johnson, and use this large increase in capital to yield a commeasurate increase in profit.


Thinking about the nature of their investment (in MJ in 2017), perhaps this is a case of diworsification, in that they moved too far away from their comfort zone of health and hygiene products?

Matt

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Re: Considering adding Reckitt Benckiser

#360450

Postby ADrunkenMarcus » November 26th, 2020, 9:09 pm

TheMotorcycleBoy wrote:My concern isn't so much the balance sheet per se. ...
My problem is that the high gearing levels are clearly a result of a failed business decision i.e. the acquistion of Mead Johnson.


RB's operating margin has held up even as ROCE fell significantly, which offers hope that they can recover as they deleverage. Debt is forecast to fall in absolute terms by 2022 and relative to free cash flow, falling from 4.4 times free cash flow in 2020 to 3.6 times free cash flow in 2022 - not too bad for a company like RB. It's not really growing, however its earnings are not prone to the sort of collapse like Renishaw or Royal Dutch Shell.

I agree with you about the poor acquisition. Anyone can buy growth but at the cost of a reduced proportional return on capital. I hold Diploma which is a serial acquirer, but Diploma has a great track record in integration and value creation!

Best wishes

Mark.

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Re: Considering adding Reckitt Benckiser

#360487

Postby TheMotorcycleBoy » November 27th, 2020, 5:30 am

ADrunkenMarcus wrote:
TheMotorcycleBoy wrote:My concern isn't so much the balance sheet per se. ...
My problem is that the high gearing levels are clearly a result of a failed business decision i.e. the acquistion of Mead Johnson.


RB's operating margin has held up even as ROCE fell significantly,

Are you sure Mark?

In FY2019 they actually reported an operating loss which would be imply a -ve OM. Albeit a statutory one. That was why I included CROCI in my profitability+gearing comparison with REL, since the loss was mostly down to a huge impairment charge, and as this would be added back in the cash flow calcs it seemed wise to appraise this metric too.

which offers hope that they can recover as they deleverage.

Who knows? Perhaps it could be viewed as a value share now. If I held them, I'd wonder how much of the recently acquired Baby Powder assets they impaired in FY2019, and whether all those acquired assets will go down the tubes or be flogged off on the cheap. One has to ask why they don't seem to manage to convert MJ into a cash cow in China (like they promised in 2017). Perhaps the Chinese Market is too competitive for them?

Matt

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Re: Considering adding Reckitt Benckiser

#360515

Postby monabri » November 27th, 2020, 9:07 am

The OM is reported pretty flat over the last 10 years...almost a "pencil straight line" at 26%.

http://financials.morningstar.com/ratio ... region=GBR


https://qz.com/1323471/ten-years-after- ... t-remains/

( note the security tags in the photo).

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Re: Considering adding Reckitt Benckiser

#360525

Postby TheMotorcycleBoy » November 27th, 2020, 10:07 am

monabri wrote:The OM is reported pretty flat over the last 10 years...almost a "pencil straight line" at 26%.

http://financials.morningstar.com/ratio ... region=GBR


https://qz.com/1323471/ten-years-after- ... t-remains/

( note the security tags in the photo).

Except for 2019 where on a statutory basis it's MINUS 15.21% due to it being an operating loss.

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Re: Considering adding Reckitt Benckiser

#360528

Postby scrumpyjack » November 27th, 2020, 10:12 am

TheMotorcycleBoy wrote:
monabri wrote:The OM is reported pretty flat over the last 10 years...almost a "pencil straight line" at 26%.

http://financials.morningstar.com/ratio ... region=GBR


https://qz.com/1323471/ten-years-after- ... t-remains/

( note the security tags in the photo).

Except for 2019 where on a statutory basis it's MINUS 15.21% due to it being an operating loss.


Hang on, you're talking about the actual bottom line there. You are not meant to look at that. All that matters is the 'adjusted', 'core', 'ignore anything inconvenient' profit.

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Re: Considering adding Reckitt Benckiser

#360529

Postby TheMotorcycleBoy » November 27th, 2020, 10:13 am

That qz article monabri linked is interesting.

Not that foreign milk is immune from safety issues—earlier this year, a French milk-powder producer recalled 7,000 tons of infant formula after babies fell ill consuming products from the firm contaminated with salmonella. Yet parents still don’t trust domestic brands as much as they do foreign ones. Even though “food in China is generally safe, the risk of a food safety incident is still high,” says Yasuda.

For parents, the lesson has been that it’s better to be extra cautious rather than sorry.

“I feel like foreign baby powder is better,” says 25-year-old Zeng Yingpei, who lives in the southern city of Foshan and buys German baby formula for her two-year-old. Citing the Sanlu scandal, she quoted a popular refrain: “It only takes one mouse dropping to ruin the whole pot of porridge.”

So perhaps this is a plus for RB.?

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Re: Considering adding Reckitt Benckiser

#360531

Postby TheMotorcycleBoy » November 27th, 2020, 10:16 am

scrumpyjack wrote:
TheMotorcycleBoy wrote:
monabri wrote:The OM is reported pretty flat over the last 10 years...almost a "pencil straight line" at 26%.

http://financials.morningstar.com/ratio ... region=GBR


https://qz.com/1323471/ten-years-after- ... t-remains/

( note the security tags in the photo).

Except for 2019 where on a statutory basis it's MINUS 15.21% due to it being an operating loss.


Hang on, you're talking about the actual bottom line there. You are not meant to look at that. All that matters is the 'adjusted', 'core', 'ignore anything inconvenient' profit.

Ha ha! That's why I do the DD. Slowly whilst finding out about the firm.

So like I said right here what did they impair to give the disconnect between statutory and la-la land? Was it the "failed" MJ purchase?

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Re: Considering adding Reckitt Benckiser

#360533

Postby TheMotorcycleBoy » November 27th, 2020, 10:23 am

Note that CROCI also collapsed from 2017, then worse in 2018, then even worse in 2019. Forget the balance sheet in absentia, CROCI measures the strength of internal cash gen. from capital employed. Go figure.

Maybe if we subtract the goodwill (due to MJ/2017) from the CROCI calc. things get rosier. So they overpaid big for MJ right?

Does management have the "eye of the owner" to paraphrase WB?

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Re: Considering adding Reckitt Benckiser

#360648

Postby ADrunkenMarcus » November 27th, 2020, 3:22 pm

TheMotorcycleBoy wrote:
ADrunkenMarcus wrote:
TheMotorcycleBoy wrote:My concern isn't so much the balance sheet per se. ...
My problem is that the high gearing levels are clearly a result of a failed business decision i.e. the acquistion of Mead Johnson.


RB's operating margin has held up even as ROCE fell significantly,

Are you sure Mark?

In FY2019 they actually reported an operating loss which would be imply a -ve OM. Albeit a statutory one. That was why I included CROCI in my profitability+gearing comparison with REL, since the loss was mostly down to a huge impairment charge, and as this would be added back in the cash flow calcs it seemed wise to appraise this metric too.


I calculate ROCE and OM data manually for my shareholdings each year. RB.'s OM held up in 2017 and 2018 as the ROCE fell and this looks like it'll be true for 2020, too.

Best wishes

Mark.

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Re: Considering adding Reckitt Benckiser

#360656

Postby ADrunkenMarcus » November 27th, 2020, 3:58 pm

TheMotorcycleBoy wrote:“I feel like foreign baby powder is better,” says 25-year-old Zeng Yingpei, who lives in the southern city of Foshan and buys German baby formula for her two-year-old. Citing the Sanlu scandal, she quoted a popular refrain: “It only takes one mouse dropping to ruin the whole pot of porridge.” [/i]So perhaps this is a plus for RB.?


The same may well be true of condoms.

Best wishes


Mark.

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Re: Considering adding Reckitt Benckiser

#360671

Postby TheMotorcycleBoy » November 27th, 2020, 4:42 pm

ADrunkenMarcus wrote:
TheMotorcycleBoy wrote:“I feel like foreign baby powder is better,” says 25-year-old Zeng Yingpei, who lives in the southern city of Foshan and buys German baby formula for her two-year-old. Citing the Sanlu scandal, she quoted a popular refrain: “It only takes one mouse dropping to ruin the whole pot of porridge.” [/i]So perhaps this is a plus for RB.?


The same may well be true of condoms.

Best wishes


Mark.

Although, more embarrassing for the husband, if the wife suggests there's a mouse in the condom......when there wasn't one there originally...if you catch my drift.

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Re: Considering adding Reckitt Benckiser

#361743

Postby KnightOfSpring » December 1st, 2020, 11:23 am

Fundsmith have just announced they have exited "their longstanding position" in Reckitts in their November factsheet. Seems an odd time to do it, although don't know what price they had exited at as it has been volatile in November. From memory they said the arrival of the new CEO bought their holding more time. He seemed to be turning things round and has (the CEO) bought more shares (as has the Chairman I think) on the recent weakness. Doesn't seem to tie in with their Chlorox sale, which is also big in cleaning and had a clear boost from Covid, as the price was much stronger there and was probably a small holding as newly initiated. Perhaps they have uncovered something of concern that has tipped the balance for them.

Although this may be stock specific, I don't get the sense that Terry has the same feeling that Nick Train has that many UK shares are undervalued. Nick indeed seems to be getting increasingly more vocal on the UK undervaluation. UK shares now worth only 9.9% of Fundsmith's portfolio despite being much lower rated. I know Terry focusses more on ROCE than PEs but seems more comfortable holding US shares with PEs of 40-70 than UK ones in the same sector (with slightly lower ROCEs) on PEs of 20-30.

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Re: Considering adding Reckitt Benckiser

#361888

Postby simoan » December 1st, 2020, 5:37 pm

KnightOfSpring wrote:Fundsmith have just announced they have exited "their longstanding position" in Reckitts in their November factsheet. Seems an odd time to do it, although don't know what price they had exited at as it has been volatile in November. From memory they said the arrival of the new CEO bought their holding more time. He seemed to be turning things round and has (the CEO) bought more shares (as has the Chairman I think) on the recent weakness. Doesn't seem to tie in with their Chlorox sale, which is also big in cleaning and had a clear boost from Covid, as the price was much stronger there and was probably a small holding as newly initiated. Perhaps they have uncovered something of concern that has tipped the balance for them.

Although this may be stock specific, I don't get the sense that Terry has the same feeling that Nick Train has that many UK shares are undervalued. Nick indeed seems to be getting increasingly more vocal on the UK undervaluation. UK shares now worth only 9.9% of Fundsmith's portfolio despite being much lower rated. I know Terry focusses more on ROCE than PEs but seems more comfortable holding US shares with PEs of 40-70 than UK ones in the same sector (with slightly lower ROCEs) on PEs of 20-30.

I was surprised he held onto RB. after the Mead Johnson acquisition that wrecked the balance sheet and reduced ROCE. It's the kind of poor management decision where here he has just dumped a holding in the past e.g. Nestle. I don't think you should read to much into the timing of the sale. Reckitts had probably been a low conviction holding ready for sale for some time, and he only got rid once a new higher conviction idea came along at a good price.

All the best, Si

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Re: Considering adding Reckitt Benckiser

#361911

Postby KnightOfSpring » December 1st, 2020, 7:29 pm

Yes quite possible that it was waiting to be sold. The last CEO has got a lot to answer for with the Mead Johnson acquisition and much else besides (as I have previously posted a relative worked there but left as they couldn't deal with the oppressive atmosphere nor the chaotic nature). The new CEO from Pepsi (a Terry Smith holding) seems much better and has (possibly) quickly resolved many issues.

Thinking about it, Smith might of just got rid of the last few shares of RB in November and so may have taken advantage of some good price strength in the months before that (not too disimilar to Chlorox). UK exposure fell from October to November from 11% to 9.9% which wasn't that large an amount when you consider that both Sage and Intertek fell a reasonable amount on results.

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Re: Considering adding Reckitt Benckiser

#361915

Postby ADrunkenMarcus » December 1st, 2020, 8:04 pm

It'll be interesting to see what the new position, which is effectively a replacement, is!

Best wishes

Mark.

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Re: Considering adding Reckitt Benckiser

#362015

Postby TheMotorcycleBoy » December 2nd, 2020, 9:18 am

KnightOfSpring wrote:Yes quite possible that it was waiting to be sold. The last CEO has got a lot to answer for with the Mead Johnson acquisition and much else besides (as I have previously posted a relative worked there but left as they couldn't deal with the oppressive atmosphere nor the chaotic nature). The new CEO from Pepsi (a Terry Smith holding) seems much better and has (possibly) quickly resolved many issues.

Thinking about it, Smith might of just got rid of the last few shares of RB in November and so may have taken advantage of some good price strength in the months before that (not too disimilar to Chlorox). UK exposure fell from October to November from 11% to 9.9% which wasn't that large an amount when you consider that both Sage and Intertek fell a reasonable amount on results.

Hi KoS,

Could you share a link to the announcement please?

thanks Matt


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