RBC Capital Markets lowers target price on Reckitt

RBC Capital said there was "a decent business" trying to be heard at Reckitt, but noted that right now it was not getting much airtime. Unlike previous hiatuses, Reckitt's "trade-spend reporting anomaly" cannot be attributed to circumstances outside the company's control and has dented the bank's confidence in the firm.

Reckitt recently identified "an understatement of trade spend in two Middle Eastern markets related to the fourth quarter and prior quarters of 2023. Following an investigation, Reckitt concluded "a small group of employees" had acted inappropriately and as a result, full-year net revenues were £55.0m lower than previously expected.

"That said, it does make sense that this was an isolated incident, if only because it seems to have been so inept on the part of the culprits. They were always going to be found out. We believe Reckitt is meaningfully undervalued and that this will not persist indefinitely, whether it's the stock market or some other investor that resolves it," said RBC. "We appreciate that Reckitt is the progenitor of this latest misfortune, but can't help thinking that if we're right and at the heart of Reckitt there's a business with good brands in good categories being competently managed, this undervaluation cannot persist indefinitely."

The Canadian bank noted that it couldn't say whether the mechanism of resolving this undervaluation would be the shares' re-rating on the back of less accident-prone financial results or the emergence of a trade or financial buyer, but it stated it was "not inclined" to describe Reckitt in 'value trap' terms and, consequently, expects the gap with its target price to narrow, leading to it also reiterating its 'outperform' rating on the stock.

Reporting by Iain Gilbert at Sharecast.com