Berenberg lowers target price on Reckitt Group

Berenberg noted that Reckitt's Q1 results revealed that group like-for-like sales grew by 1.5%, ahead of visible alpha consensus expectations of a -1.1% decline, driven by a price/mix of 2.0% and a decline in volumes of only 0.5%, the latter of which was significantly better than the 3.3% expected.

At the divisional level, hygiene achieved like-for-like sales growth of 7.1%, while health like-for-like sales grew by 1.0% and nutrition declined by 9.9%, better than the 14.2% drop predicted by analysts. Actual group sales of £3.73bn also came in 1% ahead of consensus.

"After six quarters of mid-single-digit volume declines, the better-than-expected volume development in Q1 will likely lead some investors to review the investment case on Reckitt. The bull case, in our view, includes the potential return to volume growth, which appears closer than it did a few months ago (we now expect volumes to turn positive in Q3 versus Q4 previously). Growth from pricing could also prove more resilient, with management taking selective price increases this year and a constructive outlook on mix as innovation platforms seem to be supporting premiumisation within the company’s Powerbrands. Therefore the earnings downgrade cycle may not persist into H2 2024 as we previously anticipated," said Berenberg.

"That being said, after years of significant volatility, the bear case includes limited visibility and risk to earnings from a deterioration in the consumer backdrop, unfavourable FX and earnings-dilutive business disposals. In addition, ongoing litigation risks relating to the necrotizing enterocolitis (NEC) trials in the US, could limit any short-term stock rerating."

In addition to lowering its target price on the stock, the German bank also reiterated its 'hold' rating on Reckitt shares.

Reporting by Iain Gilbert at Sharecast.com