Reckitt: New CEO’s Strategy Update Failed to Impress Investors but Should Come as No Surprise

We confirm our GBX 5,900 fair value estimate for wide-moat Reckitt RKT following a slightly disappointing third-quarter trading update and a strategic refresh that delivered few surprises but likely failed to impress investors. This was the first quarterly update with new CEO Kris Licht fully at the helm. His first stab at a strategic refresh suggested to us a continuation of the prevailing trajectory and guidance from the former management. The market was perhaps looking for a more meaningful change given the lackluster share price performance over the last year. The share price was down 2% in early trading and went down 6% after the analyst call. We believe the reaction is overblown, as we had anticipated that Licht, a company insider who was part of the last strategy update in 2020 as chief transformation officer, would not stray far from the prevailing strategy, at least for now. We believe the 2023 price/earnings multiple of around 16 times that the stock is currently trading at is not justified given Reckitt’s long-term growth prospects and margin profile, translating into a share price upside of around 20% from current levels.

The third-quarter like-for-like net revenue growth was 3.4%, slightly behind the 3.7% company-complied consensus. Within this, however, the reported volume contribution was substantially lower than the consensus (negative 4.1% compared with negative 2.4% in the consensus). Our third-quarter volume forecast was more closely aligned with the result (negative 3.9%), as we did not anticipate a meaningful volume recovery in the third quarter. For us, the only surprise in the quarterly update came from the nutrition segment, where the volume decline accelerated substantially compared with the first half (negative 15.7% in the third quarter compared with negative 5.2% in the first half). According to management, this is motivated by Reckitt lapping the peak level of market share from last year when Abbott faced supply chain challenges.