Berenberg lowers target price on 'still mispriced' Reckitt

Analysts at Berenberg slashed their target price on household goods manufacturer Reckitt from 8,200.0p to 7,050.0p on Thursday but reiterated its 'buy' rating on the "still mispriced" stock.

Berenberg noted that in Reckitt's third-quarter results it had reported group like-for-like sales growth of 7.4%, above visible alpha-compiled consensus of 6.2%, reflecting volume growth of -4.6% and price/mix of 12%.

The German bank said the beat was predominantly driven by the group's nutrition division, which achieved 24.7% like-for-like sales growth. In other divisions, hygiene declined by 1.2% and health like-for-like sales rose by 10.7%.

"These growth rates included: 1) the continued strong positive contribution from US infant formula, which grew around 40% yoy as key competitor Abbott still faced supply issues; 2) strong growth from the over-the-counter health categories, which grew c20% from share gains and a favourable cold and flu season in key markets in the southern hemisphere; and 3) a significant headwinds from Lysol, which declined 15% yoy due to a tough comparable and post-Covid-19 normalisation," said the analysts.

Berenberg stated that its 2023 growth assumptions for Reckitt reflected a recessionary backdrop, a full reversal of market share gains in US infant formula, potential cost headwinds from a rise in labour costs, and higher financing costs.

"These prudent assumptions drive our 2023 EPS forecasts 4% lower at GBp3.31. This implies Reckitt currently trades on a recession-adjusted P/E of 17x, a discount to peers P&G and Colgate (both on c22x P/Es). Our DCF-based 12-month price target falls to 7,050.0p (from 8,200.0p), reflecting our higher WACC assumption of 7.9% owing to the recent rise in bond yields."

Reporting by Iain Gilbert at Sharecast.com