Questor share tip: Buy cash-generating Reckitt Beckiser

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By Garry White, Questor Editor


Published: 7:00AM GMT 12 Feb 2010





Reckitt Benckiser Group

Reckitt Benckiser

£32.70 +83p

Questor says BUY

Last year’s cash generation was superb and, although there are headwinds in
its pharmaceutical operations, growth in its main brands and increasing
sales in emerging markets should make up for this.

In 2001, the group, which is behind the Vanish, Calgon, Clearasil and Cillit
Bang brands, introduced the “Powerbrand” concept. The company decided to
focus on global sales of its 15 core brands – and the strategy is proving a
success.

When the strategy was introduced, Powerbrands

made up about 40pc of sales. In 2009, the figure for these 15 products after
divestments and increased promotional activity was nearer 70pc.

If the pharmaceutical business is excluded, then Powerbrands achieved organic
growth of 7pc – double the group’s other products.

Full-year results were ahead of expectations and, importantly, the group
raised its total dividend for the year by 25pc. The final dividend payment
of 57p will be made on May 27 and new investors who buy the shares before
February 22 will be entitled to this payment. The full-year dividend was
100p.

The company was so cash generative that it managed to swing from a net debt position
of £1.1bn at the end of 2008 to a net cash position of £220m. Management
expects this cash pile could grow to an impressive £1bn by the end of the
current year.

But what will it do with all this cash?

Smaller, targeted acquisitions in emerging markets are a possibility and the
group should easily be able to grow the dividend.

The company ruled out a buy-back or special dividend payment at the moment,
but if cash balance continues to increase then shareholders will want to see
at least part of it returned.

In 2009, pre-tax profit rose 28pc to £1.89bn on revenue up 18pc to £7.75bn.
Excluding currency moves, sales were up 8pc.

Perhaps the biggest issue for shareholders to consider concerns the
pharmaceutical operations. Reckitt makes the heroin substitute Suboxone, and
the product lost its “orphan drug” status in the US in October.

So far, no generic competition has appeared, but it certainly will. Last year,
US revenues from Suboxone were £502m. The treatment has exclusivity in
Europe until 2016.

Management has therefore refrained form making any forecasts for the pharma
business, but is expecting 5pc sales growth excluding this unit.

The shares were first recommended as a dividend play on March 6 last year at
£24.96 and they are 31pc ahead compared with a market up 46 pc. Investors
buying that recommendation would have locked in a yield of 4pc, but the
yield is now 3pc. There is plenty of scope for this to grow in the future.

The shares are now trading on a December 2010 earnings multiple of 16.7, but
Questor believes that the group’s excellent cash generation and its
well-devised strategy means this premium rating is deserved. The emergence
of new consumers in emerging markets also makes the long-term growth story
compelling. It is in these markets that the next billion consumers will be
found.

In 2009, emerging market revenue grew 16pc to £1.5bn with strong growth across
all regions and driven by strong sales of Vanish. Harpic and Veja sales were
also strong in Brazil. The group even managed to grow its margins in these
regions.

Questor is maintaining a buy stance on the shares because of the group’s
excellent cash generation, although cautious investors may wish to wait on
clarification on the generic situation before making a purchase.

Rolls-Royce

520½p +31.7p

Questor says HOLD

Turbine maker Rolls-Royce had an excellent 2009 and finished the year with a
record order book. Rolls is a defensive business because of the long-term
revenues generated from its installed engines base, which need servicing and
spare parts.

In the year to December 31, the group swung from pre-tax losses of £1.9bn to a
pre-tax profit of almost £3bn on revenues that increased to £10.4bn from
£9.1bn. Order intake of £13.4bn resulted in a record order book at the

year end of £58.3bn.

The group also has a robust balance sheet, with net cash of £1.3bn at the end
of the year. Although there are headwinds in its civil aerospace business,
the group’s three non-civil businesses – marine, energy and defence – all
saw sales growth in double digits.

Questor first recommended buying shares in Rolls-Royce as a tip of 2008 at
344½p and the shares are up 51pc since then against a market up 12pc. A hold
stance was placed on the shares in October when the shares were at 491.6p.

The final dividend payment

was raised 5pc to 9p a share, bringing the full-year total dividend to 15p.
The shares are now trading on a December 2010 earnings multiple of 13.8
times and yielding 3.1pc.

Questor maintains a hold rating because, although there are certainly issues
with spending in aerospace and defence, the group’s installed base should
keep the cash rolling in and there is further scope to raise the dividend.
However, the shares look fully valued for now.

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