How to plug Reckitt’s yawning gaps

Making Reckitt reliably boring was the main aim of Kris Licht, when he took charge in October last year. And look at the soaraway success he’s been having: a US legal fight over its baby milk wing that swiftly took £7 billion off the group’s market value; accounting shenanigans in the Middle East that cost £55 million sales; missed full-year revenue and margin forecasts; and all topped off with the Mount Vernon tornado that poleaxed a warehouse. Indeed, so boring has it all been that shares in the Durex-to-Dettol outfit are 15 per cent below the £58 when he took the helm.
So, you understand why, when Licht pitches up with a third-quarter update minus any obvious shockers, RBC Capital analysts might head their research note “Sigh of relief”, while those at Barclays go for “No alarms and no surprises”.
In fact, Licht’s rocky start is a bit unfair on him. Wreckitt has long been accident-prone: one reason he became its fourth boss in as many years. And the big overhang on the shares — US legal claims that formula milk from its Mead Johnson wing caused necrotising enterocolitis (NEC), an often fatal bowel disease in premature babies — is not of his making. It was a predecessor, Rakesh Kapoor, who blew $16.6 billion in 2017 on Mead: such a howler of a deal that his successor, the since-fired Starbucks boss Laxman Narasimhan, ran up an £8.5 billion bill writing down some of it and selling bits off.
Still, it’s down to Licht to clear up the mess, while putting his own stamp on the group. Is he getting anywhere? Well, in July he declared Mead “non-core”, while making another move to “sharpen” up Reckitt’s portfolio and focus on 11 “powerbrands”. They include Strepsils, Vanish and Lysol: the handy bleach that Donald Trump suggested injecting to fight Covid.
As part of that focus, on the block went an “Essential Home” portfolio with £1.9 billion of net sales last year, starring Air Wick and Cillit Bang. Private equity is now sniffing around, even if reports that it could fetch £6 billion look a bit racy.
The upshot? There are lots of moving parts to Reckitt even before you get on to the figures. That the nine-month sales of £10.6 billion only included like-for-like growth of 0.4 per cent hardly set the pulses racing. Yet, there were glimmers of progress in the latest quarter, where the health and hygiene wings both saw volume growth for the first time since the third quarter of 2022.
The Chinese, in particular, seem to be taken with Durex’s new “hyaluronic acid” condoms — not to be confused with hydrochloric acid. And, with inflation falling, Licht did his best to sound like an AI robot, saying he was “now seeing a more balanced algorithm for growth”.
The shares rose 4 per cent to £49.53. But a big move depends on a fix for Reckitt’s baby milk blues. In two cases so far, US lawyers have won a $60 million damages verdict against Reckitt and $495 million against rival Abbott — despite three US federal health agencies finding “no conclusive evidence that pre-term infant formula causes NEC”.
Despite appeals, offloading Mead in the face of hundreds of lawsuits looks impossible: one reason Licht said he was “open-minded” over a settlement at the right time. But sort the litigation, sell Mead and get a decent price for the “Essential Home” brands and the shares would re-rate. Still, that’s easier said than done. There’s some way to go before Reckitt’s as boring as Licht wants.
Proof that the Civil Aviation Authority was right not to cave in to Heathrow’s Covid-fuelled demands to double passenger charges: contrary to the claims from its previous boss — the hot-air balloon, John Holland-Kaye — traffic has bounced back far quicker than the airport forecast.
The result? It has just raised its estimates for passenger volumes this year to a record 83.8 million, while reporting adjusted profits for the first nine months of £350 million pre-tax and a “probable” return to dividends for investors.
True, some of this is down to the better management of Holland-Kaye’s successor Thomas Woldbye: a fellow who prefers getting on with the job and finding £400 million of cost savings to histrionic lobbying. Even after a 9.2 per cent drop to £1.67 billion in aeronautical income — thanks to the regulator cutting charges rather than doubling them — Woldbye must be able to spot he’s running a dividend machine.
How big a one is a moot point, mainly dependent on whether Heathrow has another go at a third runway, likely to cost £30 billion. Thanks to a rejig of shareholders, Woldbye is not pushing that now. But if it didn’t do it, Heathrow would easily have the readies for £500 million dividends a year. Indeed, it could double that, experts reckon, if the business with a regulated asset base of £20.3 billion and net debt of £16.6 billion took gearing to 90 per cent. Stick to a two-runway airport and investors could be in for high-flying returns.
A handbagging for Mike Ashley. Few are more suited to an Oversized Alexa than the Frasers founder. Yet, his attempt to carry off the entire Mulberry range, even for £111 million at 150p a share, always looked doomed. He owned 37 per cent of the bombed-out luxury goods group but was up against the Malaysian billionaire Ong Beng Seng and his wife, Christina, with 56.4 per cent. Both they and the board found Big Mike’s offer “untenable”, even allowing for Ong’s ding-dong with authorities in Singapore over a bribery scandal.
Having packed in its bid, repricing Mulberry shares at 110p, Frasers now wants a seat on the board. Despite Big Mike’s encyclopaedic knowledge of posh handbags, it may struggle with that too.