Reckitt meets City cynicism

Investment Column

Deciphering what is going on at Reckitt & Colman is difficult, given the massive reshaping that the group has been undergoing for the past year or so. Out has gone the original mustard to fruit squash businesses, replaced by L&F Household, which for pounds 1bn brought in Lysol, the leading US disinfectant brand. Having dumped most of the foods business, the aim is to become the world's leading household products company and to dominate over-the-counter pharmaceuticals.

It is an ambitious strategy and one greeted with some cynicism in the City following the uninspiring results achieved from Reckitt's last big US acquisition. Yesterday's figures, showing underlying profits before exceptionals up 5.5 per cent to pounds 285m, appeared to reinforce that prejudice. The figures were at the bottom of expectations, while earnings per share slipped a touch from 45p to 44.7p.

This is a transition period, however, and 1995 is not a year to judge Reckitts. After plunging for most of 1996, the shares put on 34p to 655p yesterday.

The figures themselves were complicated by pounds 139m of reorganisation costs taken in 1994 and profits on the sale of businesses, which soared from pounds 29m to pounds 133m after the sale of UK foods. More important has been the disruption caused by the integration of L&F. The resulting destocking in the supply chain cut around pounds 60m from North American sales. That hit Reckitt's old brands particularly hard. L&F itself showed underlying growth of 10 per cent last year, while the group outside the US was 5 per cent ahead.

The cost reduction programme, due to deliver pounds 40m by next year in the US and pounds 25m in Europe, is on target. Increased efficiency helped boost operating margins from 14.8 per cent to 15.2 per cent in 1995. It should not be difficult for Reckitt to lift returns to L&F's level of 16 per cent, with the 18 per cent achieved by Clorox, a US rival, a longer-term target.

But the group must prove that it can achieve growth through more than just cost savings. Volume growth in the main Western markets is still minimal and despite Reckitt's claims that it is insulated by the one-off, specialist nature of its products, retail competition is intense on both sides of the Atlantic. It remains to be seen whether the undoubted growth potential of emerging markets in Latin America to Asia will be sufficient to take up the slack.

Profits of around pounds 315m this year would put the shares on a forward multiple of 14. Fair value for now.