The Investment Column: Reckitt shows its polish, and there's more to come

Ultimate Leisure could yet be another Reubens' masterpiece; Child's play at DIC makes sage investment
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The Independent Online

Reckitt Benckiser showed a clean pair of heels to its rivals in the consumer goods world yesterday with another set of sparkling results.

Doubts that the soaring cost of raw materials in 2005 had hampered the group's progress Vanished after Reckitt announced it had Finished the year by hitting its 20 per cent operating margin target one year early. It was Clearastill that Reckitt, whose products seek to make our homes shine brighter and whiter, is set for another year of industry outperformance when the group Resolved to deliver operating margins of 22 per cent by 2008.

Shareholders in the group have cleaned up since it was created just over six years ago by the merger of Reckitt & Coleman with Benckiser of the Netherlands. Its relentless focus on improving its products drove net revenues 5 per cent higher to £1.1bn in its fourth quarter at constant exchange rates. For the year the increase was 6 per cent to £4.2bn, which delivered a 16 per cent increase in pre-tax profits to £876m.

Housewives (and husbands) can now use a 5-in-1 Finish Powerball in their dishwasher or call on Vanish Crystal White powder to attack even dried-in stains. And after the completion of its £1.9bn acquisition of Boots' over-the-counter healthcare business last week, spotty teenagers can look forward to more ways to banish their acne with new varieties of Clearasil while popping Nurofen to dull any aches and pains.

The only potential headache for investors is that the group's markets in Western Europe are growing more slowly than they have done for years. The tough trading backdrop combined with the challenge of integrating the Boots acquisition gives less clarity than usual about the outcome for 2006.

Conversely, Reckitt is confident that its cost-saving programme will compensate for any more pain on the raw materials front. Including the impact of the new Boots business, which will cost the group £150m to restructure, it expects to achieve net income growth of low double digits and net revenue growth in the mid teens. Shares in the group, which rose 43p to 1,978p yesterday, trade at a hefty 17 times 2007 earnings. Yet again that premium looks well deserved. Keep stocking the bathroom cabinet.

Ultimate Leisure could yet be another Reubens' masterpiece

Over the past few months the billionaire Reuben brothers have been steadily building up a stake in Ultimate Leisure through contracts for difference. On Tuesday the duo converted these derivatives into actual shares and now control 29.9 per cent of the bars and nightclubs group.

To say they are shrewd investors would be putting it mildly. They made their fortune in the 1990s by setting up a metals trading business in Russia and selling it to Chelsea owner Roman Abramovich. They have been busy reinvesting their money in the UK and have built up a substantial property portfolio.

Ultimate's property backing is clearly the main reason for their interest in the company. At yesterday's closing share price of 266p the group is valued at £65m. But its property estate is worth £80m. This ascribes a negative value to Ultimate's operating business which last year registered sales of £36m. Admittedly, since then trading has deteriorated greatly.

However, its managers have a clear turnaround strategy. They intend to reinvest in the group's rundown estate and build up a series of brands. Ultimate has a strong balance sheet, so it should have no problem financing these reforms. In fact it has promised to continue paying dividends. The group's management already have quite a reputation for reviving down-on-their-luck bar operators. They led the renaissance of Yates a few years ago and eventually sold the group on to a private-equity firm.

Ultimate's asset backing means there is little downside in its shares, and once trading starts to pick up they should start to motor. Investors would do well to follow the lead of the Reuben brothers and buy.

Child's play at DIC makes sage investment

An animated version of Warren Buffett yesterday joined Inspector Gadget and the Care Bears as one of the characters DIC Entertainment aims to promote. The group plans to create a series called the Secret Millionaires Club in which the legendary Sage of Omaha will teach children about the ways of capitalism. The show may be popular with ambitious American parents keen to see their children get on in the world, but will the kids like it?

DIC will make money from the venture by releasing the series on DVD and selling it globally via a major distributor. However, as far as the group's overall operations go it is small beer. The children's character group pulled off its big coup earlier this year when it did a major deal with CBS. DIC will manage the US broadcaster's three-hour Saturday morning kids' slot in return for a share of advertising revenues.

The slot is due to be launched in the second half of this year and it will not only boost DIC's financials but also will enhance the group's profile across the Atlantic and possibly lead to further tie-ups with US media luminaries. At 256.5p, the stock trades at a discount to rivals Chorion and Entertainment Rights, making it a buy.

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