Reckitt Earnings: Steep Price Increases Take a Toll on Hygiene Volumes in a Challenging Market

Wide-moat Reckitt reported first-half 2023 like-for-like net revenue growth of 6.0% and an adjusted operating margin of 23.8%, both slightly ahead of company-compiled consensus of 5.8% and 23.4%, respectively. Still, shares were down on the print, which we believe is due to volumes being weaker than expected (volumes down 4.4% versus down 4.0% for consensus), and primarily driven by the hygiene segment (volumes down 8.9% in the first half), and due to management's cautious tone regarding the second half and what is expected to be a tougher competitive environment. Management confirmed the full-year top-line guidance of 3%-5% like-for-like net revenue growth for the group and increased the adjusted EBIT guidance to slightly above 2022 levels (from in line or slightly above previously) when excluding the one-off benefit of approximately 80 basis points related to U.S. nutrition. The EBIT margin guidance would basically translate into an operating margin slightly above 23%. Our forecast already assumed a 23.3% adjusted operating margin, which we are now more confident can be achieved given the relatively solid delivery in the first half. We confirm our GBX 6,900 fair value estimate and increase our U.S. share class fair value estimate to $17.80 from $17.10 on a stronger British pound. Shares are about 15% undervalued at current levels.