Reckitt Benckiser cleans up once more

Reckitt Benckiser; Psion; CMG
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The Independent Online

Another squeaky-clean performance from Reckitt Benckiser left holders of this defensive stock sitting pretty.

Since it was formed in December 1999 through a merger between Britain's Reckitt & Colman and Benckiser of the Netherlands, the company has delivered one sparkling performance after another. Much like its new Finish 3-in-1 dishwasher detergent, in fact, which is just one of Reckitt Benckiser's new products and which is driving top-line growth.

The company behind household favourites like Vanish, Dettol and Mr Sheen yesterday reported a 10 per cent surge in sales for the half-year, or 6 per cent at constant exchange rates, to £1.7bn from £1.55bn. Already well above the 2 per cent industry average, Reckitt's confidence prompted it to up its target sales growth for this year (at constant exchange rates) to 6 per cent from 5 per cent. It also increased net profit targets to 18 per cent from 14 per cent after reporting a 33 per cent leap in pre-tax profit to £227m from £171m a year earlier.

While typifying the apt management of Bart Becht, the chief executive, the revised goals beg the question how much more can the Reckitt-Benckiser merger yield?

Margin expansion for one. Operating margins in the half-year increased by 60 basis points to 13.7 per cent and have soared by 3.2 basis points since 1999. Reckitt remains hungry for the 17 or 18 per cent recorded by Colgate, Proctor & Gamble and Clorex, and is confident of matching these by continuing to squeeze costs out of the supply chain. Hot on the heels of its imaginatively entitled "squeeze programme" comes Reckitt's "x-trim project" to deliver cost savings by re-configuring plants, optimising distribution flows and maximising e-business opportunities.

Another merger plus that Mr Becht is still working through is the stream of new products that Reckitt & Coleman had squirreled away. The launch of the Immac warm wax roll-on, which promises to revolutionise women's depilatory habits and developed by the old Reckitt, illustrates Benckiser's get-the-goods-out philosophy. With new products comprising 17 per cent of Reckitt Benckiser's sales after 18 months, the group is on course to emulate Benckiser, where new products totalled 40 per cent of sales within three years of their launch.

Recent fill-in acquisitions in Asia, of Indonesia's leading pest-control product Tiga Roda and Korea's Oxy-Clean colour-save bleach, should help Reckitt further expand its global net – by more roll outs and further globalising core brands. Its shares, which yesterday slipped 5p to 1050p, look fairly valued as they did last time this column reviewed them. On this year's forecast, profits of about £456m and earnings per share of 45.1p, they trade on a prospective rating of 22. A core holding.

Psion

Spare a thought for investors in Psion, the former stock market high flyer. Only 18 months ago the shares were flying high at an internet-boom fueled 1450p and Psion was the flag-carrier for the UK consumer electronics sector. Now the stock is languishing at just 60p after yesterday's 11 per cent fall. Every time it looks like it can't get worse, it does.

Yesterday's results were no surprise, wrecked as they were by restructuring charges following July's announcement to pull out of the consumer market for handheld devices.

With that business being wound down Psion's future depends on two ventures but the worry for shareholders is that both look vulnerable. The first is Teklogix, a business acquired last year and which provides handheld computers and software for corporate customers like Volkswagen. Sales are up 15 per cent in the first half. But the worry is that Teklogix is severely exposed to the kind of cutbacks in IT spending which are becoming increasingly common.

The second big bet is the Symbian joint venture with Ericsson, Nokia and Matsushita. But Symbian's operating system for the net generation of mobile phones is being hampered by the delays in the roll-out of these new networks. New funding is required and it is by no means clear whether Psion can afford it as its net cash is down to just £18m. The choice is to stump up funds it can ill afford or see its 28 per cent stake diluted.

It all looks rather grim. After half-year losses of £54m following heavy exceptional charges, the full-year outcome is anyone's guess. Long-suffering investors might as well hang on in the hope that Symbian or Teklogix turn out to be gems. Otherwise, avoid.

CMG

When we last reviewed CMG in April, the stock had plunged 70 per cent from its 1763p high in early 2000. Despite the shares being at 433p, we judged that downside risk remained. This is the backdrop to the stock's 48.5p rebound yesterday to 262p.

CMG's principal business, accounting for over five-sixth of sales, is supplying information technology to big corporations and governments. Here, the company's two main territories, the UK and Benelux, recorded double-digit percentage top-line growth, though smaller operations in France and Germany fared much less well.

Total IT system sales grew 36 per cent to £399m in the first half, while operating profit rose at a slightly faster pace to £49.7m. Wireless data software used in text messaging suffered a slight decline in first-half sales to £57.7m and posted a £22.6m loss.

What helped to light a fire under the stock was the continuing expansion in IT service revenue and the assertion of one Dutch executive that the worst of the tech crash is behind us. On prospective full-year earnings of 8.5p per share CMG carries a rather hefty price/earnings multiple of 31, falling to 18 in 2002. That's high enough.

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