Canaccord Genuity hails Reckitt Benckiser's exceptionally strong results

Reckitt Benckiser's full-year results were "exceptionally strong", broker Canaccord Genuity said following the company's latest results, but the shares already "full-valuation" meant that it left its 'hold' recommendation on ice.

The consumer goods giant's full-year results easily surpassed analysts estimates for its earnings per share by 7%, with about four percentage points of the 'beat' being the result of the company's "strong" operational performance, analysts Alicia Forry and Eddy Hargreaves said in a research note sent to clients.

The rest was mainly attributable to a lower than expected tax charge of 20%.

Cost savings from its Supercharge programme delivered an earlier than expected bang, boosting operating margings by 250 basis points in the back-half of the year, Forry and Hargreaves said.

As well, the company's guidance for growth of between 4% to 5%, excluding saving from Supercharge was "conservative", "which the market will anticipate being raised later in the year," the analysts said.

"Fiscal year 2016 consensus estimates coming into today's results stood at sales +4.9% and operating margin +70 basis points. We think there is already some modest upside to this."

To take note of as well were the relatively unconsolidated nature of many of Reckitt's markets, its high market shares and continuing strong innovation track versus the wider health and personal care sector, the broker added.

Indeed, innovation was exceptionally strong behind Scholl, Durex, Nurofen and other brands, driving a 14% like-for-like gain in sales at its consumer health business over the last fiscal year, the broker explained.

One negative aspect of the full-year numbers was the decline free-cash-flow conversion from 103% in fiscal year 2014 to 95% in 2015, as actual tax payments rose, but the broker expect that to resume a higher level in FY16.

Mind the possible indigestion from M&A

At 23 times their estimate for earnings per share and 17 times the estimated enterprise value-to-earnings before interest, taxes, depreciation and amortisation the stock was changing hands at premiums of approximately 10% and 20% on each of those valuations metrics versus the wider HPC sector, Canaccord Genuity said.

"FY16 earnings growth is likely to moderate with a) a higher tax rate b) less benefit from Supercharge savings c) destocking of some seasonal Health brands in H116 d) tough comps. Valuation is relatively full in our view, with the market anticipating a sizeable acquisition: a double-edged sword. While raising our target price by 4%, we therefore retain a HOLD recommendation," the analysts concluded.

The target price on the shares was bumped up from 5,825p to 6,030p.

As of 11:05 shares in Reckitt Benckiser were higher by 6.13% to 6,347p.