Reckitt Benckiser capitalises on Anglo-Dutch merger benefits

Incepta shows scope for an upgrade; Bett Brothers building on strong gains in the North
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Reckitt Benckiser has certainly polished up its act since the household goods group was formed in 1999. The "new and improved" company has delivered sparkling results and yesterday's figures for the first three months of the year were no exception.

The group has prospered since homegrown Reckitt & Colman merged with the Netherlands' Benckiser. The steady stream of "best ever" products that have hit supermarket shelves around the world combines Reckitt's strong product development work with Benckiser's get-it-out philosophy. Improvements to the group's Finish and Calgonit dishwashing products and its Airwick air fresheners sent customers diving for their wallets in the first quarter, setting a trend for the year.

While Reckitt may tempt shoppers with new launches, it manages to entice investors with bullish goals. Mr Bart Becht, the chief executive, said yesterday that the group's annual figures would be at the top end of its targets of 4 to 6 per cent sales growth and 12 to 15 per cent net income growth. This followed a 5 per cent first-quarter sales rise to £855m from £817m and a 17 per cent gain in pre-tax profits to £96m.

The main blot on an otherwise squeaky clean landscape was Reckitt's emerging markets performance, where sales fell 6 per cent. But the group made up for this with strong growth in Western Europe and North America, which contribute three-quarters of sales.

Its higher-margin new products, such as its range of heavy-duty cleaning wipes, lower raw material costs and a slew of internal cost-savings programmes helped Reckitt to improve its operating margin by 60 basis points to 12.6 per cent. The group has further to go to match the 17 to 18 per cent trumpeted by its US peers such as Colgate and Proctor & Gamble, but momentum is there.

Although cost savings from the merger will not last forever, Reckitt has a cupboard full of plans to drive growth. These include focusing on 15 "power brands" with the aim of increasing their contribution to net revenues to 50 per cent by 2005 against 40 per cent now. Central to this will be one name for one brand – hence Immac depilatory cream, as it is known in the UK, will be renamed Veet. And with debt expected to be all but eradicated by the end of 2003, analysts expect Reckitt to hit the acquisition trail.

The group commands a stock market premium for its strong defensive qualities, which have shone through in the past year. Yet even on a price/earnings ratio of about 23 times, Reckitt lags the US peer group it is chasing. The stock slipped 3 per cent to 1,250p yesterday on profit-taking. After such a strong run, there is no harm locking in some gains, but the shares remain a core holding.

Incepta shows scope for an upgrade

"Robust figures in a challenging market for public relations and advertising." "Swift action to cut costs positions business to benefit from any upturn." "Optimistic signs on trading, but planning for the year on a prudent basis."

This was the spin being put on yesterday's dismal figures from Incepta, the PR business whose shares have slumped from 183p at their height to 27p in the wake of 11 September.

The group – which owns City spin doctors Citigate Dewe Rogerson – laid off 10 per cent of its workforce in the year to February, took a restructuring charge of £8.5m, and saw pre-tax profits slump 55 per cent to £12.1m. It made a disastrous £30m acquisition of a technology marketing firm on America's west coast at the peak of the tech boom, as clients such as Cisco went into business survival mode and slashed their budgets for outside advisers. The coming year looks like being another hard one and earnings per share are predicted to fall again. It is very difficult to be sure, though, as Incepta has to issue a ton of new shares to the owners of agencies it has bought in recent years. Their final payments depend on earnings from their individual businesses. Bears of the stock have long feared a "nightmare scenario", where the individual businesses perform to their targets, forcing Incepta to issue shares worth up to £30m a pop, while the group's share price remains depressed. That would be hugely dilutive.

In truth, the chances of such a nightmare are fading fast. The share price is back up to 59p, while technology clients account for just 13 per cent of Incepta's business now.

Meanwhile, UK flotations could just be picking up, with HMV the latest in a line of compnaies to brave the public markets. Incepta has already settled into lucrative advisory roles on the forthcoming Homebase and Yell floats. If these signs of life lead to a full scale renaissance in financial activity, analysts have plenty of scope for upwards revisions to their earnings forecasts. Even now the stock is cheap compared to its peers, on around 17 times this year's earnings. Investors with a gambling streak should buy in.

Bett Brothers building on strong gains in the North

Bett Brothers may well be heading south, but its share price sure isn't. The Dundee-based builder has had a series of windfalls in recent months, and has reinvested the proceeds so wisely it has scope for a big push into new areas, such as Yorkshire and the Midlands.

The group sold its pub operations to management last year to focus on construction, and has been able to boost its bank of land for housing developments from 3,000 to 4,500 plots in six months. It has also raised margins in the division from 10 per cent, to 11.7 per cent, although it still remains well below the sector average.

The group's commercial property side delivered more than half the £7.4m profit in the half-year to 28 February, thanks to early completion of its Stobcross development in Glasgow.

But that only accounted for some of the £4m-£5m by which the City has had to hike its full-year forecasts. The number of housing completions is growing faster than expected, and there should be a steady stream of one-off windfalls from the commercial side over the coming two or three years. Selling prices, though, remain subdued, with the British economy in the doldrums.

Bett Brothers is a relatively cheap stock in the building sector, on a forward p/e of 5 even after the shares leapt 36.5p to 360p. Its old conglomerate status and its low margins mean it deserves to trade at a discount. But these are being addressed, and its northern bias shields it from fears the South-east England housing bubble could burst. Buy.

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