Investment Column: Investors clean up with Reckitt Benckiser

Atkins (WS); Hargreaves Lansdown

Alistair Dawber
Thursday 12 February 2009 01:00

Our view: Buy

Share price: 2,820p (+198p)

Reckitt Benckiser, the planet's biggest maker of household goods, reckons it has a good story to tell in the midst of these miserable markets. The chief executive, Bart Becht, said that the group had an "excellent year" in 2008 as new products such as Vanish Intelligence have been successful after a jump in marketing spending. The group posted a 26 per cent increase in 2008 profits and set a revenue growth target of 4 per cent for 2009, both beating market expectations.

Watchers at Investec say that the statement "throws down a gauntlet to the rest of the sector. The numbers suggest that the 'Reckitt model' is weathering the storm".

Shares in Reckitt Benckiser rose by 7.6 per cent yesterday, after remaining flat over the course of last year.

However, all the good news should not necessarily be treated as a green light by investors. The experts at Investec point out that the numbers were "sweetened" by very strong pharmaceutical numbers and foreign exchange movements, and despite fourth-quarter profit growth of 36 per cent, the margin actually fell, excluding these two factors. Pharmaceuticals, Investec argues, is a worry because despite the good performance from the division, several products lose their licence exclusivity later this year.

However, equity investors have not got the luxury of huge numbers of performing stocks to plump for, and while Investec advises clients to hold, others have no concerns. Those at Cazenove reckon the company is a winner: "It continues to be among our top picks. On a 2009 price-earnings ratio of 14.8 times, its premium relative to the UK market is at a four-year low... it looks attractive compared with other defensive safe-havens in food, beverages and tobacco." We agree. Buy.

Atkins (WS)

Our view: Hold

Share price: 560.5p (+19.5p)

A year ago, the Emirate of Dubai was the centre of the economic world, with increasingly ambitious building projects dwarfed just a month later by even grander, and more expensive, designs.

Now, as the financing deals for these projects run into trouble, Western bankers and deal makers are abandoning their flash cars at the airport in the rush to get back by Blighty. And this is a problem for the engineering and design consultancy WS Atkins, which yesterday said that its Middle Eastern arm was under pressure from weakening markets.

However, investors should not be too depressed about Atkins' prospects. The stock jumped 3.6 per cent yesterday, after the group confirmed it is in line to meet expectations, adding that it was axing 1,000 or so staff to counterbalance the impact of deteriorating markets. The group is generating lots of cash and has plenty of forward contracts for public-sector projects, including the London Olympics.

The analysts are split on what to do about the shares, however. Those at RBS say buy, arguing that "the shares stand on a 2009 p/e of... 6.5 times. We think that valuation looks undemanding, particularly given net cash attractions." Nonsense, say those at Shore Capital, who acknowledge the weak valuation, but would still sell: "There are a number of outliers which skew [the valuation] and using our 2010 earnings per share estimate the p/e increases to 9.3 times. We think that even on our below consensus estimates there is downside risk to the forecasts as operational gearing kicks in."

There are defensive aspects to Atkins' business, but with the stock down nearly 50 per cent in the last year, the market is not appreciating them. We would not rush in yet. Hold.

Hargreaves Lansdown

Our view: Hold

Share price: 172.75p (-3.25p)

The solution to the financial crisis, says Peter Hargreaves, chief executive of the asset manager Hargreaves Lansdown, is "cut taxes and slash public-sector workers who spend their time in meetings or on holiday".

Whether that is indeed the solution to the downturn will probably never be tested, but it cannot be argued that Mr Hargreaves is simply trying to draw attention away from his poorly performing business. In a market where financial services companies are being walloped by investors, Hargreaves Lansdown provides a haven of calm.

The group reported that interim profits were up 29 per cent to £36.5m yesterday and increased its dividend to 4.74p. Buyers will also note the fact that the shares have increased, yes increased, by 5 per cent in the last 12 months as rivals have toiled and lost huge amounts of value in some cases.

We advised selling the shares at 167.5p in August, expecting that the deteriorating economy would take its toll. Assets under management have indeed fallen, but the share price has not, despite Mr Hargreaves' assertion that the situation is worse than ever.

The problem is that the stock now looks pricey, and while we recognise Hargreaves Lansdown's stellar performance, we still worry about the sector at large. Hold.

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