Berenberg lowers target price on 'still mispriced' Reckitt

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