HSBC ReckittBenckiser (RBLN) - BuyNear-termresiliencelong-termopportunity Mar 18 2020

18 March 2020
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Reckitt Benckiser (RB/ LN) Equities

Household Products
Buy: Near-term resilience, long-term opportunity United Kingdom
 A stock for extraordinary times: Reckitt’s category mix offers MAINTAIN BUY
exceptional demand resilience amid the COVID-19 pandemic
TARGET PRICE (GBPp) PREVIOUS TARGET (GBPp)
 New CEO Laxman Narasimhan’s strategy for Reckitt should
mark a decisive moment in the group’s turnaround 6,800 7,100
 SHARE PRICE (GBPp) UPSIDE/DOWNSIDE
Target price moves to 6,800p (7,100p) as forecasts fall
7-10% based on increased investment in the recovery plan 5,300 +28.3%
(as of 16 Mar 2020)
Amid the extreme challenges created by the COVID-19 pandemic, Reckitt’s portfolio MARKET DATA
Market cap (GBPm) 37,617 Free float 100%
should prove one of the most resilient across the entire market. Household cleaners Market cap (USDm) 46,250 BBG RB/ LN
and cold & flu medications make up almost 25% of sales, where demand is up 3m ADTV (USDm) 247 RIC RB.L
materially. The main limiting factor here is likely to be the extent to which Reckitt can FINANCIALS AND RATIOS (GBPp)
scale-up supply. With consumption in Reckitt’s other categories likely to be stable, Year to 12/2019a 12/2020e 12/2021e 12/2022e
HSBC EPS 349.0 279.3 295.1 329.9
we have a confidence in our near-term forecasts that is hard to replicate elsewhere. HSBC EPS (prev) 327.4 311.9 329.9 354.8
Yet we also do not just regard Reckitt as a stock for the here-and-now as we identify Change (%) 6.6 -10.4 -10.6 -7.0
Consensus EPS 330.1 300.3 315.8 327.4
a range of factors which enable optimism longer-term prospects. PE (x) 15.2 19.0 18.0 16.1
Dividend yield (%) 3.3 3.3 3.3 3.3
New strategy a decisive moment in the turnaround: After four years of difficulties, EV/EBITDA (x) 5.4 14.4 13.6 12.1
we think that new CEO Laxman Narasimhan’s strategy contains the ingredients ROE (%) 20.5 20.3 19.9 20.4
needed to revitalise growth at Reckitt. Most importantly, the increased levels of 52-WEEK PRICE (GBPp)
investment should make Reckitt vastly better resourced across its business with a
7100
stronger in-market presence. Many of the targeted improvements (e.g. procurement,
6000
new market organisations) look to be substantially in Reckitt’s control, which gives us
greater confidence in eventual success. In-market trends have generally been better 4900
03/19 09/19 03/20
than recent results portray, suggesting that brand equities remain generally intact. Target price: 6800 High: 6688 Low: 5150 Current: 5300
Lays the path for longer-term outperformance: Beside our endorsement of the Source: Refinitiv IBES, HSBC estimates
CEO’s strategy, we retain a fundamental conviction in the long-term vitality of

Reckitt’s categories. As we demonstrate later in the report, preference for global Jeremy Fialko*, CFA
Head of Consumer Staples Research, Europe
brands where Reckitt competes remains strong while lower levels of penetration in HSBC Bank plc
developed and emerging markets offer potential for above-industry long-term growth. jeremy.fialko@hsbc.com
+44 20 7991 1562
Buy, price target 6,800p: Due to higher investment than previously factored into our Robert Price*
estimates (including some temporary items), our 2020 and 2021 EPS estimates fall Analyst
HSBC Bank plc
by c10%. The longer-term cut to our forecasts is around 7%. This results in our DCF robert.h.price@hsbc.com
+44 20 3268 4001
derived target price for Reckitt falling from 7,100p to 6,800p, which implies 28.3%
upside to the current share price. After years of disappointment and estimate cuts,
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is
the group’s new strategy should make a line in the sand that paves the way for not registered/ qualified pursuant to FINRA regulations
Reckitt to consistently deliver on its commitments to investors over the coming year.
Having previously traded on a much loftier peer relative multiple, this holds out the
potential prize of a substantial re-rating. Buy.
2020Institutional Investor survey | 2nd Mar –3rd Apr Click here to vote
Disclosures & Disclaimer Issuer of report: HSBC Bank plc

This report must be read with the disclosures and the analyst certifications in
View HSBC Global Research at:
the Disclosure appendix, and with the Disclaimer, which forms part of it. https://www.research.hsbc.com
Equities ● Household Products
18 March 2020
Financials & valuation: Reckitt Benckiser Buy
Financial statements Valuation data

Year to 12/2019a 12/2020e 12/2021e 12/2022e Year to 12/2019a 12/2020e 12/2021e 12/2022e
Profit & loss summary (GBPm) EV/sales 3.8 3.7 3.6 3.4
Revenue 12,846 12,790 13,208 13,703 EV/EBITDA 5.4 14.4 13.6 12.1
EBITDA 8,921 3,322 3,475 3,802 EV/IC 2.0 1.9 1.9 1.9
Depreciation & amortisation -5,554 -460 -474 -488 PE* 15.2 19.0 18.0 16.1
Operating profit/EBIT 3,367 2,862 3,002 3,314 PB 4.0 3.7 3.4 3.1
Net interest -153 -283 -271 -256 FCF yield (%) 5.7 4.8 5.2 6.3
PBT -2,107 2,579 2,730 3,058 Dividend yield (%) 3.3 3.3 3.3 3.3
HSBC PBT 3,179 2,579 2,730 3,058 * Based on HSBC EPS (diluted)
Taxation -665 -580 -614 -688
Net profit -2,785 1,980 2,097 2,351
HSBC net profit 2,473 1,980 2,097 2,351 ESG metrics
Cash flow summary (GBPm) Environmental Indicators 12/2018a Governance Indicators 12/2018a
Cash flow from operations 2,551 2,378 2,560 2,903 GHG emission intensity* 23.6 No. of board members 10
Capex -443 -587 -603 -520 Energy intensity* [n/a] Average board tenure (years) 3.9
Cash flow from investment -424 -587 -603 -520 CO2 reduction policy Yes Female board members (%) 30
Dividends -1,242 -1,254 -1,257 -1,261
Social Indicators 12/2018a Board members independence (%) 80
Change in net debt 3 -561 -629 -1,052
FCF equity 2,145 1,792 1,956 2,383 Employee costs as % of revenues 14
Balance sheet summary (GBPm) Employee turnover (%) 20
Diversity policy Yes
Intangible fixed assets 24,261 24,336 24,411 24,486
Tangible fixed assets 2,140 2,192 2,246 2,204 Source: Company data, HSBC
Current assets 5,033 5,701 6,481 7,633 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
Cash & others 1,549 2,017 2,647 3,699
Total assets 32,139 32,934 33,843 35,028
Operating liabilities 5,648 5,698 5,748 5,823 Issuer information
Gross debt 12,195 12,195 12,195 12,195 Share price (GBPp) 5,300 Free float 100%
Net debt 10,749 10,188 9,558 8,506 Target price (GBPp) 6,800 Sector Household Products
Shareholders' funds 9,363 10,102 10,956 12,060 RIC (Equity) RB.L Country/Region United Kingdom
Invested capital 24,237 24,514 24,743 24,801
Bloomberg (Equity) RB/ LN Analyst Jeremy Fialko, CFA
Market cap (USDm) 46,250 Contact +44 20 7991 1562
Ratio, growth and per share analysis
Year to 12/2019a 12/2020e 12/2021e 12/2022e
Price relative
Y-o-y % change
Revenue 2.0 -0.4 3.3 3.8
EBITDA 136.1 -62.8 4.6 9.4 7800 7800
Operating profit -0.1 -15.0 4.9 10.4 7300 7300
PBT -177.5 5.9 12.0
6800 6800
HSBC EPS 2.8 -20.0 5.6 11.8
Ratios (%) 6300 6300
Revenue/IC (x) 0.5 0.5 0.5 0.6 5800 5800

ROIC 16.3 9.1 9.4 10.4 5300 5300
ROE 20.5 20.3 19.9 20.4 4800 4800
ROA -7.3 6.8 7.0 7.5 2018 2019 2020
EBITDA margin 69.4 26.0 26.3 27.7 Reckitt Benckiser Rel to FTSE ALL-SHARE
Operating profit margin 26.2 22.4 22.7 24.2
EBITDA/net interest (x) 58.3 11.7 12.8 14.9 Source: HSBC
Net debt/equity 114.3 100.4 86.8 70.2 Note: Priced at close of 16 Mar 2020
Net debt/EBITDA (x) 1.2 3.1 2.8 2.2
CF from operations/net debt 23.7 23.3 26.8 34.1
Per share data (GBPp)
EPS Rep (diluted) -393.0 279.3 295.1 329.9
HSBC EPS (diluted) 349.0 279.3 295.1 329.9
DPS 174.6 175.0 175.0 175.0
Book value 1321.2 1425.5 1541.5 1692.1
2
18 March 2020
The strategy and why it

can work
 A period of sustained disappointment gives new CEO a blank slate

with which to determine the best path forward for Reckitt
 Many of the targeted improvements are well within Reckitt’s control.
Combined with meaningful extra investment we see a high chance
of success
 Category mix offers good near-term resilience while fundamental
analysis of the business highlights its good long-term positioning
2020 and the effects of COVID-19
Before addressing the fundamentals of the Reckitt investment case, we briefly touch on why we
think Reckitt Benckiser should have one of the most resilient portfolios of any company globally
in facing the extraordinary challenges created by COVID-19.
It comes down to the group’s category exposure. There have been widespread reports of a
surge in demand for cleaning products, disinfectants and OTC medications. For example,
leading US retailer Kroger recently announced restrictions on the number of sanitisation and
cold & flu products its customers could purchase. A look at the Boots UK website shows virtually
all Lemsip SKUs are sold out online along with multiple Nurofen SKUs. Similarly, there are
virtually no Mucinex SKUs available for purchase online on the Walgreens website (both as of
12 March 2020) (some concern has been raised by health authorities in France and the UK
surrounding the use of anti-inflammatory medications, such as ibuprofen, to treat COVID-19
although other experts and health authorities say there is no evidence to back-up these worries.
Sources: BBC, Pharmacy Times, www.hse.ie)
Separately, according a Reuters article, Reckitt is the first company to obtain a strain of the
novel coronavirus (SARS-CoV-2), cause of COVID-19. It is currently in the process of rapidly
duplicating the virus samples to ensure sufficient quantities for testing. To make an anti-
coronavirus claim, Reckitt will need to prove that its products are effective against 99.9% of the
virus and complete a series of regulatory tests. This process could still take several months but
any anti-coronavirus products are still likely to prove highly popular once they are launched.
Based on our analysis, Reckitt’s portfolio has the second highest exposure, narrowly behind
Clorox, to categories where demand could have potentially strengthened due to the pandemic
at just under 25%. Hence a 10-20% increase in sales in these categories would lead to a 250-
500bp benefit to organic growth for as long as demand remains elevated (albeit in subsequent
quarters there could be some de-stocking and tough comparatives the following year).
3
18 March 2020
Exposure to COVID-19 sensitive categories by company, % of sales (2019)
35%
30%
25%
20%
15%
10%
5%
0%
Clorox Reckitt GSK P&G JNJ Sanofi Bayer Henkel Colgate Unilever
OTC COVID-19 categories Home care COVID-19 categories
Source: HSBC, company data, Euromonitor
COVID-19 sensitive categories comprise all household cleaners, bleaches and cold & flu related medication
At the same time, we have to be circumspect on implications for Reckitt’s sales. Even if demand
for certain products is currently very strong, questions remain over Reckitt’s ability to convert
this into sales. There are two elements to our caution:
1. Reckitt’s own ability to manufacture the products. On the FY results call, management
highlighted supply issues in OTC had constrained sales in Q4. The situation has improved
since then but it is highly possible that some demand cannot be met
2. Potential for broader disruption in retail supply chains preventing products from getting
on shelf
Beyond these specific categories, there is a higher degree of uncertainty over demand for Reckitt’s
other products. As consumer staples, consumption patterns are generally stable but it is possible
that reduced shopping trips will lead to an element of pantry de-stocking or just lower demand.
Trying to put all of this in a nutshell our views are:

 Sales of OTC and household cleaners products are likely to be stronger than originally
envisaged, the extent of which is dependent on the degree to which Reckitt can meet demand
 Sales in other categories potentially affected by supply chain issues and pantry de-stocking
but with consumption likely to be stable
In the FY results presentation Reckitt said that 2020 had got off to a ‘strong’ start,
understandably couched in uncertainty over COVID-19. Our view is that based on Reckitt’s
category exposures the overall effect is likely to be accretive to sales but only modestly.
Reckitt’s current guidance for 2020 is that organic sales growth will exceed the 2019 level
(0.8%). We currently forecast 2.3% (little changed versus our previous forecast of 2.7%) with
stronger sales of hygiene and OTC products offset by tempered expectations for milk formula
(unrelated to any COVID-19 issues but more the ongoing difficulties in China). Nonetheless it is
somewhat ahead of the company’s guidance and reflective of a clear improvement over 2019.
We outline our forecasts in more detail over the longer term towards the end of this report.
4
18 March 2020
Reckitt Benckiser quarterly moving average organic growth

12%
9%
6%
3%
0%
-3%
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Organic growth Quarterly MAT (RB) Quarterly MAT (RB:adjusted for cyber attack) Quarterly MAT (Peers)
Source: Source: Company filings, HSBC
Laxman Narasimhan’s inheritance
Successive problems reflect underlying issues

The history of Reckitt over the last four years has been beset with problems and
disappointments. Initially they appeared to be one–off in nature but both the frequency with
which they occurred and, often, a prolonged recovery time made it increasingly clear that many
of the issues were more deep-seated.
Beyond the collection of issues directly affecting Reckitt’s business, the huge amount of change
and distraction within the organisation also looks to have played a role in the poor results. When
everything that has happened to Reckitt is listed, it is hardly a surprise that the business is not
firing as it should. To recap, the last four years have witnessed:
 May 2016. Korean HS (humidifier steriliser) issue
 Q2 2016 onwards. Major decline in Scholl sales after several years of strong growth due to
the failure of its gadgets
 February 2017. Announcement of Mead Johnson acquisition (completed June 2017)
 June 2017. WannaCry cyber-attack
 October 2017. Announcement of Health and Hygiene-Home business split
 October 2018. Mead Johnson supply chain problems
 April 2019. US Justice Department indictment of Indivior
The start of these problems coincided with the slide in Reckitt’s organic sales growth (see top
chart) from which it is yet to recover.
In a business which historically relied on mix and operational leverage, the lack of organic sales
growth simultaneously deprived Reckitt of its main source of margin expansion. Meanwhile
short-term measures to protect profitability amid the turmoil either weakened the group’s reach
and capabilities or led to pricing getting out of alignment in certain instances.
5
18 March 2020
Reckitt – ten year margin development
29%
28%
27%
26%
25%
24%
23%
22%
21%
20%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Company filings, HSBC
At the same time, we also think it is hard to argue that the underinvestment was acute. For
example, Reckitt’s brand equity investment (BEI) stayed relatively constant as a percentage of
sales. Meanwhile the group’s gross margin was also stable, indicating that there has not been a
dramatic reduction in SG&A expenses to protect/expand operating margins (as was the case
with Henkel).
Reckitt gross margins 2011-19 Reckitt BEI as a percentage of sales, 2011-

19
65% 20%
64% 19%
63% 18%
62% 17%
61% 16%
60% 15%
59% 14%
58% 13%
57% 12%
56% 11%
55% 10%
2011
2012
2013
2014
2015
2016
2017
2018
2019
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: Company Source: Company

Note 2011 was the first year with the current definition of brand equity
investment (BEI)
Nonetheless, such a spate of poor results – particularly within Health – offered ample illustration
that elements of Reckitt’s approach need to change. Now that Mr Narasimhan has unveiled his
strategy, we are in a position to assess whether it offers sufficient tangible measures to be
confident of a turnaround in the group’s fortunes.
The diagnostic and the plan
Laxman Narasimhan was announced as Reckitt’s new CEO in June 2019 and joined the
company at the start of September. Prior to joining Reckitt he was PepsiCo’s Chief Commercial
Officer, having previously run its Foods business in the Americas. His earlier career was spent
at McKinsey where he spent two decades working across multiple geographies.
6
18 March 2020
In the run-up to the results at the end of February 2020, Mr Narasimhan had almost five months
to carry out his diagnostic of the business and formulate plan for improvement. We briefly
summarise the main elements of this before discussing Reckitt’s chance of success
Diagnosing the problems

Many of issues identified in the new CEO’s presentation were consistent with previous outside
observations. These included:
 Attempting to force too much change on the organisation too quickly
 Running the business too hot in places, leaving insufficient slack to absorb external shocks
 Lack of focus on Rest of Health amid a more complicated than expected Mead Johnson
integration
 Poor commercial execution, as witnessed by out of stocks and a failure to anticipate retailer
demand
 Patchy innovations with too many failing to meet the targets set
While these shortcomings were easier for outsiders to determine, Reckitt’s performance in other
areas fell below what we had envisaged, as the following slide illustrates.
Reckitt performance quartile versus peers 2019

Area RB performance quartile vs peers 2019 (1st is best)
BEI effectiveness/ 4 3 2 1
efficiency
Direct 4 3 2 1
procurement
Indirect 4 3 2 1
procurement
Manufacturing 4 3 2 1
efficiency
Supply 4 3 2 1
Planning
RB position
Source: Company
Far from the perception of Reckitt being an efficient company, its performance on five metrics
highlighted by management averaged third quartile. Our view is that through being too tight on
capex and certain overhead investments in the short-term, Reckitt ended up costing itself
money through a lack of best-in-class systems and processes. We also wonder whether the
group’s ‘speed over perfection’ mantra meant that in the interests of being fast moving, there
simply wasn’t the co-ordinated, high-level focus on certain metrics. When the business was
performing well, the lack of attention to these metrics could more easily be overlooked but the
longer-term consequences were serious.
The proposed fix

One of the reasons for our fundamental optimism surrounding Reckitt is a belief that it is
positioned in categories with scope to boost penetration and add new usage occasions. Yet the
combination of insufficient investment and a distracted organisation prevented Reckitt from
taking advantage of these strengths.
We now discuss some of the main elements within the plan to reignite Reckitt’s growth.
7
18 March 2020
Increased investment
The most important element of Reckitt’s plan is a material increase in investment behind the
business over the coming years. This will be comprised of:
 P&L investment of £200m per annum over three years
 Reinvested productivity savings. Reckitt spoke of a £1.3bn productivity programme over
three years. Initially we were rather incredulous that Reckitt could find such a high level of
savings although, in practice, the difference relates more to how Reckitt uses the savings
rather than the quantum. £450m per annum is around 5% of Reckitt’s total costs, which we
regard as usual for a large FMCG company. The difference is that previously local
management teams could do what they wished with the savings (often retain) whereas the
group now intends to take a much more co-ordinated approach.
 Transformation costs of £250m spread over two years
 Capital expenditure of £300m over and above Reckitt’s typical run rate of 3% of sales
during the coming two years
Sources of Reckitt's GBP1.3bn productivity savings
Fixed Cost Improvement

• Process automation
• Better leverage
35% Commercial Levers

• Sales excellence
• Commercial spend
55% • Marketing excellence
• Indirect procurement
10%
End-to-end Operations
• Direct procurement
• End to end supply chain
Source: Company
New CMUs
Reckitt currently has 75 CMU (category market units) – specific focus cells which get the
majority of senior management attention and more dedicated resource – and this is set to
increase to 100. Within Health this will rise from 35 to 50 and in Hygiene (previously Hygiene
Home) from 40 to 50.
In the presentation Reckitt provided evidence showing how its market shares in the areas where
it has dedicated CMUs, are somewhat higher than when it doesn’t (see chart). This stands to
reason since the focus and dedicated resources of having a CMU are materially greater.
8
18 March 2020
Potential market share benefit through dedicated CMU creation
100 bps
Avg
Top 40 Next 10 Remaining
Source: Company
Organisational structure
Having previously incorporated Mead Johnson within the Health division, the specific
characteristics of (infant) nutrition mean that it will be run as a separate category in future. The
remainder of Health and Hygiene Home (renamed just Hygiene) will continue mostly as before.
Given its importance, particularly to the Nutrition division, China will have its own integrated
three category business unit.
Amid criticism of Reckitt for foisting too much change on an organisation too quickly, there were
questions over whether this reorganisation would burden the group with yet more distraction.
According to CEO Laxman Narasimhan, the change to front-line operations is set to be minimal.
More relevant is the fact senior leadership will have dedicated oversight of Nutrition and
OTC/Rest of Health, which was not the case previously.
New Reckitt organisational structure
Hygiene Health Nutrition
China
eCommerce
Global functions
Source: Company
9
18 March 2020
Doubling e-commerce business

Despite some of Reckitt’s recent shortcomings, it has still done a reasonable job in e-
commerce. Currently the company has e-commerce operations in 40 countries and it comprises
c10% of sales, which is towards the high end of the staples peer group. The current growth rate
is c30%, roughly in line with the industry.
The group is planning to use two separate e-commerce models. The first is through mainstream
retailers and large marketplaces, where scale is the key. The second is for direct-to-consumer
businesses, cross-border e-commerce and digital native brands, where speed is key.
Closing competitive gaps

As highlighted in the chart on page 7, Reckitt averages third quartile on the five selected
efficiency measures.
Given the level of investment that Reckitt is prepared to put into its business, we think that
moving up at least one quartile on all the metrics is very much within Reckitt’s control.
When contrasting Reckitt with some of its consumer staples peers, we think it can benefit from
its more focused nature when implementing this sort of change. Even though Reckitt is strong
where it competes, it does not have the sprawling nature of a Nestlé or a Unilever, which should
make it easier/quicker to pivot the organisation.
Pricing actions
One of the least satisfactory aspects of Reckitt’s performance in the last two years has been its
weak Health volumes. Not only was overall growth limited but this came entirely from price and
mix with volumes either flat or negative.
RB Health organic growth split

6%
4%
4% 4%
2% 3% 3% 3% 3%
1% 2% 2% 1% 1%
0%
-1%
-2% -3%
-4%
-4%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2018 2019
Volume growth rate (%) Price growth rate (%) Organic growth rate (%)
Source: HSBC, company data
One important caveat when comparing Reckitt’s organic growth breakdown with its peers is that
Reckitt includes mix within price while other companies (notably Nestlé and Unilever) include
mix within volume. Therefore, in virtually all circumstances Reckitt will show weaker volumes
than peers – given that generating positive mix is a part of every company’s strategy.
Nonetheless, the scale of the imbalance between volume and price suggests that in areas
Reckitt was pricing too aggressively. One illustration of this was the need to cut prices of Dettol
in South Asia (mainly India) to stem market share losses.
Given the new CEO had a carte blanche to make whatever price adjustments he deemed
appropriate, we thought his prognosis on this point was relatively reassuring. One of his tasks
on becoming CEO was to review all Reckitt’s price points alongside the associated elasticises.
10
18 March 2020
In most instances he found that Reckitt’s pricing was appropriate. Yet there were some areas
where pricing had got out of line and the group has made adjustments. With this included in the
group’s guidance, the potential downside through a need for the group to make widespread
pricing adjustments is now capped.
Reckitt’s targets and the path to get there
In the medium-term Reckitt expects to deliver the following:

 Organic sales. Mid-single digit organic revenue growth. In markets growing 3+% to 5+%
per annum, this implies Reckitt expects to sustainably outperform by 100-200bp per annum
 Margin. Rebuilding operating margin back to the mid-20s
 EPS growth 7-9% per annum
 ‘Strong’ cash conversion, which we interpret to mean at least 90% of adjusted net profit
The path to reaching these targets though will be a gradual one. For 2020 Reckitt targets
organic sales growth above 2019’s level (0.8%) alongside margins of 22-23%, some 350bp
below 2019’s level. This 350bp reduction is made up of three separate components:
 Reversal of 2019 tailwinds. This assumes normal variable pay in 2020 following a 100bp
reduction in 2019
 Additional long-term investment. This is the £200m of ongoing investment (150bp of
sales) in improved capabilities, customer service and value previously referenced
 One-time transformation costs of £250m over the next two years (100bp per annum),
including items such as up-front costs to generate productivity savings and creation of the
new three BU organisational structure
Management has spoken of two distinct phases of c18 months each in reaching its medium-
term targets. The first is about stabilising the performance of its Health business and building
the improved capabilities. The second is about building on these capabilities and stepping up
growth towards the desired mid-single-digit level.
Following our piece ahead of the investor day (see What we want to hear, 29 January 2020) the
plan covered a lot of the elements we hoped to see. Critical now is both putting it into practice
and also assessing whether end market conditions will enable Reckitt to deliver the desired
outcome.
Why the plan can succeed
In this section of the report, we outline why we think that Reckitt’s plan can succeed. We start by
presenting some high level analysis of Reckitt’s business and then we follow this by looking at
each category in greater detail.
Our conviction in the categories
One of the reasons for our previous positive stance on Reckitt is our view that it is positioned in
categories which can deliver above-industry growth, where the functionality of its brands will
continue to resonate with consumers.
11
18 March 2020
Preference for local brands by category, global average (%) (2017)
60
50
40
30
20
10
Source: Nielsen Global Brand Origin Report
Preference for local brands byThis

category, global average
was something (%) (2017)
we discussed in our initiation report on the European Food & HPC names
(see European Consumer Staples – Initiating coverage: Up for the challenge, 27 June 2019).
There were two particular characteristics of Reckitt’s categories which stood out, which should
ensure that the established brands can continue to grow well.
The first is that Reckitt competes in categories where consumers continue to value international
brands. Based on Nielsen data and weighting each company’s portfolio by its category data, we
found that Reckitt is the company among our coverage where preference for local brands is lowest.
Ranked local brand preference by company (2017)
Danone
Nestlé
Unilever
Henkel
L'Oréal
Beiersdorf
Reckitt
0 5 10 15 20 25 30 35 40
Source: HSBC, Nielsen, Euromonitor
The second element is Reckitt’s presence in categories where we perceive there to be switching
costs, which temper consumers’ enthusiasm for trying new brands once they have an established
preference. With Reckitt occupying a position of incumbency this should work in its favour.
12
18 March 2020
Categories exhibiting additional switching costs

Company Categories % of sales Scale of switching Ranking (consumer Ranking (group)
costs businesses only)
Beiersdorf None 0% n/a 6 -
(Consumer)
Beiersdorf (Group) Tesa Direct Industries 11% Medium - 6
Danone Specialised nutrition 30% Low 3 4
Henkel (HPC only) Professional haircare 10% Medium 5 -
Henkel (Group) Professional haircare + 48% Medium-high - 1
Industrial Adhesives
L'Oréal Professional haircare 12% Medium 4 5
Nestlé Nutrition & Health Science, 37% Low 2 3
Pet food, Nespresso
Reckitt Infant formula, OTC 38% Low 1 2
Unilever None 0% n/a 7 7
The third reason for expecting that Reckitt can deliver above industry growth is its presence in
categories which still offer good scope to increase penetration and trade-up consumers. We
address this more fully in the following sections, where we address each division in turn.
Nutrition
Reckitt’s infant nutrition business came through the June 2017 acquisition of Mead Johnson for
GBP13.0bn (GBP14.2bn including acquired debt). Although the acquisition multiple of around
18.0x historic EV/EBITDA seemed reasonable, the Mead business at the time was going
through considerable difficulties as the Chinese market shifted quickly into segments where
Mead was underweight and it lost share in the US. Cumulatively these two markets represent
around two-thirds of the Mead business.
Since Reckitt acquired Mead, performance of the business has improved with meaningfully
negative organic sales having been turned into slightly positive growth (taking 2019 as a whole).
Yet overall performance has been below expectations while future prospects are also weaker.
Consequently, Reckitt took a GBP5.0bn goodwill writedown with its 2019 results.
Mead Johnson/Reckitt IFCN organic growth 2014-19

12%
8%
4%
0%
-4%
-8%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2014 2015 2016 2017 2018 2019
Organic growth rate (%) Quarterly MAT (%)
Going into greater detail on the writedown, Reckitt cited:

 Increased competition in China, particularly from domestic companies
 Ongoing weakening of growth in China due to lower than expected birth rates
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18 March 2020
 Disruption to the Hong Kong cross-border trade

 Tougher than expected trading in ASEAN and LATAM
 Need for additional investment in the Mead Johnson supply chain
 Longer and more challenging integration process
Consistent with this more cautious outlook for the business, Reckitt lowered its anticipated
2020-29 revenue growth from 3-6% to 2-4% and gross profit growth from 4-9% to 2-4%.
As much as the writedown reflects poorly on the acquisition, it is a historical adjustment

reflecting facts that are known and discounted within the share price. More relevant is that
based on the current run rate, Reckitt’s growth is materially below the 2-4% run rate used in
assessing Mead Johnson’s fair value and the 3-5% per annum medium-term growth expectation
highlighted in the results presentation.
How can Reckitt get there and how long will it take?
When assessing prospects for Nutrition, the business needs to be broken down into its three
discrete components: China, the US and everywhere else. We start with China.
China
On acquiring Mead Johnson, turning around China was clearly the group’s biggest priority. Due
to a surge in demand for fully imported (versus locally packaged) product, where it was
underweight, Mead was losing share. Meanwhile it was late to enter the ultra-premium category.
Initially Reckitt’s turnaround showed some promising signs. It rectified much of its underweight
positioning in fully imported product and mother & baby stores (MBS) and the ultra-premium
Enfinitas grew well.
Yet from autumn 2018 things once again began to slip. A supply interruption to Enfinitas with no
source of alternative capacity meant Reckitt lost a cohort of babies while strong competition from
local players led to share loss in the (standard) premium end of the market. This all happened amid
a backdrop of weaker than expected volumes due to the low birth rate (see chart).
Number of births in China 2000-19 (m)

18.0
17.5
17.0
16.5
16.0
15.5
15.0
14.5
14.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: China National Bureau of Statistics
Looking both at Euromonitor data and financial performance of listed domestic players, dramatic
changes in the market’s competitive landscape are apparent. Looking specifically at 2018 and
2019 results, two trends are apparent:
 Stable to modestly declining share for the main international players
14
18 March 2020
 Dramatic market share gains for larger local players with most of this coming from smaller
local players, whose share has declined dramatically
Market share of leading China milk formula players 2014-19
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Nestlé Feihe Danone Abbott Reckitt Junlebao Yili F/Campina Ausnutria H&H
2014 2015 2016 2017 2018 2019
Source: Euromonitor
Growth of China sales - listed milk formula companies
100%
80%
60%
40%
20%
0%
-20%
Nestlé Feihe* Danone Abbott Reckitt Yili* Ausnutria* H&H* Mengniu*
2016 2017 2018 2019/2019 YTD
* Based on 2019 9M results
Based on the collapse in smaller players’ market share (over 30% in 2015 to 13% in 2019,
according to Euromonitor), they are no longer such a material source of share gains for the
larger players, whether domestic or international. At the same time, the low 2019 birth rate will
continue to depress volumes as lower numbers of babies move onto follow-on formula (FFO)
and growing-up milk (GUM) in 2020.
Undeniably this represents a difficult backdrop for Reckitt and most of the other players. Yet we
still see opportunities to eke out growth. These come from:
 Premiumisation. As we have seen in other sectors (e.g. cosmetics), the Chinese
consumer continues to trade up and we expect this dynamic to continue
 Stronger innovation pipeline. At the results presentation, there appeared some
confidence that the innovation pipeline was in better shape. In the results release the
company referenced an improvement in Q4 thanks to its grass fed launch
15
18 March 2020
 Expansion into new (sub) categories. Besides leveraging its very strong heritage in milk
formula for babies with allergies (Nutramigen), where the Chinese market still seems highly
undeveloped (see chart), Reckitt also looks to expand beyond infant formula e.g. into
products for senior citizens.
 Expansion into new channels. An example given in the presentation was cross-border e-
commerce but we have also seen Danone make good headway in lower-tier cities
Special milk formula market size in US special milk formula market shares
relation to total (2019, USDm) (2019)
30,000
25,000
20,000 2%4%
2%
10%
15,000
49%
10,000
33%
5,000
0
China US Reckitt Abbott
Nestlé Danone
Total milk formula Special milk formula
Private Label Others
Source: Euromonitor Source: Euromonitor
At the same time we have to recognise that all Reckitt’s competitors will be pursuing similar
growth strategies. Moreover, each company’s whitespace will almost inevitably overlap another
company’s stronghold. Hence what Reckitt might gain through strengthening its presence in
allergy could be (partially) offset by losses as other companies encroach on its strongholds in
the south-east of the country.
The difference between now and before the margin reset is resources and focus. Not only does
Reckitt now have more production capacity than a year ago, but it is also putting considerably
more resources behind its go-to-market effort alongside a dedicated China organisation. Of all
the areas set to see greater investment following unveiling of the plans, we think China milk
formula is right at the top of the list. Even in highly competitive markets this should translate into
a better relative performance.
Although not necessarily something we can expect to benefit the industry in 2020, it is highly
plausible that the government takes further action to boost the birth rate.
USA
The US is the one part of the infant formula business which has lived up to expectations. In the
run-up to Reckitt purchasing Mead, it lost considerable ground to the market leader (Abbott) as
short-term decisions to reduce investment backfired and innovation failed to keep pace.
Through a combination of putting resources back into areas from which it had been removed
(e.g. sampling in hospitals) and the successful launch of its NeuroPro range, Reckitt has closed
the gap on leader Abbott, as the Euromonitor market share data illustrates.
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18 March 2020
US milk formula market shares 2010-19 (%)
50
45
40
35
30
25
20
15
10
5
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Abbott Reckitt Nestle Private label
Source: Euromonitor
Looking at the US market more broadly, it is fundamentally a duopoly with the two leading
players, Reckitt and Abbott, holding a combined share of around 80%. Nestlé has consistently
been a distant third (this is not a priority market for them) while private label has similarly
hovered around 5%.
As a market, growth of milk formula for 0-6 month olds is likely to be limited. The most recent
data points to a slow decline in the number of births while the breastfeeding rate has edged up,
albeit at a slower rate than in previous years.
Number of US births and YoY change, 2010-18
4,100,000 1.4% 2.0%
1.0%
4,000,000
0.0%
-0.2%
-0.5% 0.0%
-0.8%
3,900,000 -1.1%
-1.7% -1.0%
3,800,000 -2.3%
-2.0%
3,700,000 -3.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Number of births Growth rate (%)

Source: CDC
17
18 March 2020
US six month breastfeeding rates

55.3% 57.6% 57.3%
60% 51.8%
49.4% 51.4%
46.6% 47.5%
50%
40%
30% 24.9% 24.9% 25.4%

21.9% 22.3%
17.2% 18.8%
20% 15.6%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016
Exclusively through 6 months At 6 months
Source: CDC
There are though avenues through which this volume decline can be offset:
 Trade-up. Even if the trade-up dynamic in the US is nowhere near as strong as in China,
the consumer is still responsive to innovations as Reckitt’s success with the NeuroPro
launch illustrates
 Penetration of follow-on formula and growing-up milks. In comparison with many other
countries, considerably fewer US babies have follow-on formula or growing-up milk. Reckitt
will no doubt seek to address this imbalance
Rest of the World

Accounting for around a third of the acquired Mead Johnson business, the markets outside
China have generally been disappointing over the last three years.
The business is highly dispersed geographically with the biggest markets of Mexico and the
Philippines accounting for sales of around GBP200m each, representing 6% of the Nutrition
total and hence 17-18% of the ROW region.
Estimated split of Mead Johnson sales ex-China & North America (2019)
Mexico 8%
18%
Philippines
22%
Thailand
Other Asia 17%
Other Latin America

25% 10%
Europe
Consistent with the global picture outside Africa, the number of births is relatively static and
therefore Reckitt’s primary avenues for long-term growth will be trading-up and extending the
use of milk formula longer beyond six months.
Nearer-term though the bigger source of upside is executional improvements.
18
18 March 2020
Following the Mead Johnson acquisition, its immediate priorities were turning around
performance in the two critical markets of China and the US. This meant that all of the smaller
markets in Asia and Latin America got relatively less attention. Typically, in these markets the
Mead business was bigger than the existing Reckitt business, meaning that they were mainly
run by ex-Mead mangers. Being unfamiliar with the Reckitt health categories they needed a
certain amount of time to familiarise themselves with their new responsibilities, which created an
additional layer of distraction.
Almost without exception, Reckitt has described performance in the ROW region as ‘mixed’ with
growth in certain markets being offset by declines in others.
Yet looking at the results of Reckitt’s international peers, it is clear that there is scope to do
considerably better, as the following examples illustrate:
 Danone’s Early Life Nutrition (ELN) sales grew mid-single digit outside China in 2019
 Dutch co-operative Friesland Campina referenced higher volumes and revenues in its
emerging markets ex-China.
 Abbott recorded 4.6% organic growth in International Pediatric Nutrition despite sales in
China declining.
Despite differences in each company’s geographic footprint, the aggregated performance of

Reckitt’s peers clearly demonstrates that it is possible to deliver approaching mid-single digit
growth from the ROW nutrition markets.
Over the longer-term we think Reckitt retains the possibility of pushing more decisively into
Western Europe through greater distribution of its allergy brands. India is another opportunity.
Meanwhile across all geographies adult nutrition also remains an untapped market for Reckitt.
Its nascent brain health brand Neuriva is an example
Health
Reflections on two tough years

With the planned formation of a separate division for nutrition, Reckitt’s Health business will
consist of its OTC (over-the-counter) medications and what the company terms ‘other health’,
namely Durex, Scholl and the VMS (vitamins, minerals & supplements) brands acquired
following the Schiff acquisition in late 2012.
We estimate that the division’s sales by brand are split approximately as shown in the chart below.
19
18 March 2020
Estimated brand split, Health (ex-Nutrition) (2019)
Dettol
Mucinex
Durex 15%
Scholl 23%
3%
Nurofen 3%
5%
Strepsils
Veet 6% 14%
Vitamin brands 6%
Gaviscon 7% 10%
8%
Lemsip
Other
The poor results of Reckitt’s Health division (illustrated in the chart) have been most reflective of
the malaise within the group. Among the reasons cited for poor results have been:
 Ongoing problems with Scholl as fall-out from the ill-fated shift into ‘gadgets’ continued
 De-stocking in the US but a lack of flexibility in the supply chain preventing Reckitt from fully
responding to a more recent pick-up in demand
 Lack of innovation leading to Durex share losses in China
 Insufficient price competitiveness in Dettol across multiple emerging markets leading to
share losses
Growth of OTC and Other Health 2017-19

15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2017 2018 2019
OTC Other Health

Source: Company
At the same time, certain elements of Reckitt’s poor 2019 were less within Reckitt’s control. The
weak US cold & flu season (on a tough comparative) was common to all companies and re-entry of
private label Mucinex, affecting results in late 2018 and H1 2019, was always going to be a drag.
Moreover, recent in-market trends look to have improved offering confidence that growth in
2020 can show a useful improvement. As the chart below illustrates, Reckitt’s market share in
its main OTC categories has been broadly flat in recent years (an improvement over 2016 and
2017), with the only recent area of share erosion being US cough (Mucinex) where the
previously mentioned private label re-entry was always going to be a drag- something which
materially lessened in H2 2019.
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18 March 2020
Change in Reckitt market share - key OTC categories (bp per annum)
400
300
200
100
0
-100
-200
-300
2011 2012 2013 2014 2015 2016 2017 2018 2019
Combination products US Cough remedies US Analgesics UK
Combination products UK Sore throat UK Indigestion & heartburn UK
Source: HSBC, Euromonitor
Peer results illustrate the market continues to grow

One of the big questions surrounding Reckitt’s Health business relates to whether the current
problems it faces are more reflective of structural changes in its markets. Most notable concerns
are whether the rise of online and a greater private label push from established pharmacies
erodes the pricing and market share of the large brands.
Even if this remains a risk, we note that Reckitt’s peers – all of which sell branded OTC
medications – have done considerably better. Meanwhile the market should continue to benefit
from an ageing population and the greater prevalence of self-medication.
The graph below illustrates performance of Reckitt and its largest consumer health peers over
the 2012-19 period. Just taking 2019 in isolation, Reckitt’s peers delivered an average of 3%
organic sales growth, demonstrating that it remains possible to achieve respectable organic
sales growth in spite of the challenges.
Consumer Health organic growth: Reckitt and peers
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
2012 2013 2014 2015 2016 2017 2018 2019
Bayer GSK J&J P&G Reckitt benckiser Sanofi
Source: Company
Moreover, we think that Reckitt’s OTC business should be more resilient to some of the
pressures from own label. This is because most of Reckitt’s products are for acute conditions,
meaning that consumers will likely be feeling unwell at the moment of purchase. In our opinion,
this tends to reinforce the power of brands as consumers will be more likely to go for a known
quantity at their moment of need.
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18 March 2020
How Reckitt can get back on terms

As a starting point, particularly within OTC, the underlying trends within Reckitt’s business are
clearly better than those illustrated by the reported numbers. In management’s prepared results
at the FY 2019 results presentation, it suggested that overall Health sell-out in Q4 was up by
around 2%, versus a decline of c2% in Q4.
The results commentary also suggested several other more reassuring aspects of performance.
These included:
 Reckitt referencing ‘overall positive’ share trends within its OTC business
 Ongoing mid-single digit growth of Gaviscon and Nurofen
 Improving market share trends for Mucinex now it has lapped the private label re-entry
 Dettol returning to market share growth
 Food aid element of Scholl (i.e. excluding the 17% of gadget related sales) now stable
We fully understand that there is plenty of work still needed. For example, Durex continues to
face competitive pressures in China while Scholl remains in the midst of its refocusing.
Our overriding observation is that there is nothing within Reckitt’s recent performance which
suggests that issues in its Health business are not fixable.
Where the company has taken action performance has improved and the results of Reckitt’s
peers illustrates that the large consumer health companies can continue to deliver growth
roughly in line with a market estimated to be growing at around 4% per annum. We look for
Reckitt to do at least this well as it remedies the issues outlined.
Hygiene
Benefiting from focus

After a period in which it played second-fiddle to Health, Reckitt’s Hygiene Home business (now
renamed just Hygiene) has emerged as a beacon of stability amid the turbulence elsewhere in
the group.
As the following chart illustrates, Hygiene Home (HyHo) had several years of poor results
(particularly the Home component) but the exceptionally strong growth of Health meant that
investors were prepared to look through the weakness.
Hygiene Home organic growth 2018-19

6% 5% 5%
4% 4%
3% 3% 3% 3%
2% 2%
1% 1% 1%
0%
-1% -1% -1% -1%

-3%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2018 2019
Volume growth rate (%) Price growth rate (%) Organic growth rate (%)
Source: Company
22
18 March 2020
Much of the original thinking behind the business being split into Health and Hygiene Home was
management’s view that the HyHo business had been (implicitly) de-prioritised as resources
were concentrated on the supposedly higher growth, higher margin Health business.
As the chart illustrates, Reckitt’s HyHo business saw a material uplift in growth almost as soon as
the separate divisional structure, with end-to-end profitability, was created. This poses the question
of how it was able to restore growth while Health struggled. We see several factors at play:
 More local nature of HyHo competition and innovation. Historically, a lot of innovation in
Reckitt was done locally in order to be as responsive as possible to changes in competitive
dynamics. However, as OTC became a bigger component of group sales, more innovation
became centralised due to the regulated nature of the product. This, alongside certain cost
cutting measures (Project Supercharge), blunted Reckitt’s innovative edge within the
category. As soon as the business split happened it could put its old innovation processes
back in place.
 No distraction through M&A integration. The process of integrating Mead Johnson into the
Health business was a major distraction for management. In particular, a lot of people had new
roles in categories with which they were unfamiliar and required a steep learning curve.
 Absence of ‘legacy’ issues. Here we mostly refer to effects of the decline in Scholl as
gadgets fell out of favour. This always had the potential to blunt sales for a protracted
period given a need to fundamentally rebuild the brand proposition. Hygiene Home did not
have such challenges.
Building on the revival

An average of almost 4% organic sales growth over the last eight quarters offers clear evidence
that Hygiene Home is a business which can deliver stable, sustainable organic growth. Unlike in
Health, the growth has also been much better balanced between volume and price/mix.
Rather than being a turnaround situation, key here is that this business can maintain and build
on the current run rate. In our opinion, this should not require any great leap of faith.
Even if the majority of Reckitt’s additional investment is going into Health and Nutrition, some will
feed through to the Hygiene part of the business. Given that Reckitt has already modestly outgrown
its markets in recent periods, it should be even better positioned to over the coming years.
Therefore, key is getting conviction that the markets themselves can maintain a satisfactory pace of
growth. The reason we expect Reckitt’s markets to remain robust is that the categories it competes
in mostly retain good scope to expand penetration, both in developed and emerging markets.
Automatic dishwashing is a case in point. The chart below shows UK household penetration of
dishwashers and washing machines over the last twenty years. While washing machine
penetration has been at virtually 100% for the entire period, dishwasher penetration has
consistently risen by just over 1% per annum. This should translate into 2% annual volume
growth – a situation which is being replicated in many other developed markets. Across Europe,
data from APPLiA (the association of European appliance manufacturers) shows that in the last
two years demand for dishwashers rose by 6.6% while demand for washing machines rose by
only 1.7%.
In Asia, the gap in growth is even more dramatic with dishwasher sales having grown at a
compound rate of 18% per annum versus 5% for washing machines.
23
18 March 2020
UK consumer durable penetration 2000-18 Annual unit growth of domestic appliances

in Asia
100%
40.0%
35.0%
75%
30.0%
25.0%
50%
20.0%
15.0%
25%
10.0%
5.0%
0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2015 2016 2017 2018 2019
Dish washer Washing machine Dishwashers Automatic Washing Machines
Source: Office for National Statistics Source: Euromonitor
Similar arguments can be made for growth of laundry aids. Even in developed markets, use of
such products continues to become more widespread while the still very low penetration in
emerging markets suggests that these can offer strong growth for many years to come.
Ratio of laundry aids to laundry detergents market by geography (2019)
30%
25%
20%
15%
10%
5%
0%
North America Western Europe World Latin America Asia Pacific Eastern Europe Middle East and
Africa
Source: HSBC, Euromonitor,

Note: laundry aids comprise mostly stain removers but also include categories such as water softeners and starch/ironing aids
As a final sign that home care markets are in decent shape, growth of Reckitt’s peers has
mostly been robust. The chart below illustrates that over the last five years Reckitt’s main peers
have achieved average organic sales of 3-4% per annum. Given Reckitt’s exposure to
categories which should grow above the broader category average (i.e. a lack of mainstream
laundry detergents, which is the biggest sub-category), we expect it to outperform over the
longer-term.
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18 March 2020
Home Care: Reckitt and peers' organic growth 2012-19
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
2012 2013 2014 2015 2016 2017 2018 2019
Henkel P&G Reckitt benckiser Unilever
Source: Company
With Reckitt’s own business performing satisfactorily and clear evidence that its end markets
retain plenty of scope for expansion, we regard management’s target of doing better than an
industry growing at 3-5% per annum as highly realistic.
25
18 March 2020
Forecasts and valuation
 COVID-19 is leading to unusually strong demand in categories we

estimate account for around a quarter of group sales, albeit keeping
up with supply could be a challenge
 With the planned reinvestment higher than our previous estimates
we reduce forecasts in 2020 and subsequent years
 Reckitt continues to offer material upside both in absolute terms and
in a peer group context
Forecasting Reckitt
Long-term organic sales

As discussed at the start of the report, we forecast 2.3% organic sales growth in 2020, albeit
with the exceptional circumstances creating a greater possible range of outcomes. In 2021 we
expect a further improvement in Reckitt’s organic sales growth, albeit this is likely to be rather
gradual due to tough comparatives in areas which benefited from COVID-19 related demand.
As Reckitt’s actions to strengthen organisational capabilities, boost innovation and establish
new CMUs take shape, we expect organic growth to settle in the 4-5% range.
While management spoke about outperforming its c3% category growth rate by 2023, we are
optimistic that the group can achieve this a year earlier. Frankly, we think that the three-year
timeframe for Reckitt to grow ahead of its markets is highly conservative and expect Reckitt to
get there slightly earlier, particularly given that it had already made a start on fixing some of the
underinvestment issues before Mr Narasimhan arrived on the scene.
Reckitt Benckiser organic growth forecasts

Year to December 2018 2019 2020e 2021e 2022e 2023e 2024e
Organic growth (%)
IFCN 0.0% 2.6% 0.0% 2.5% 4.0% 4.5% 4.5%
OTC 5.0% -4.4% 3.5% 4.5% 5.0% 5.5% 5.5%
Other 1.0% -2.2% 0.0% 4.0% 5.2% 5.2% 5.2%
Health total growth 1.8% -1.0% 0.9% 3.6% 4.7% 5.0% 5.0%
North America 1.3% -5.7% 2.0% 2.6% 2.7% 2.7% 2.7%

Europe/ANZ 1.5% 0.5% 1.0% 2.3% 2.5% 2.5% 2.5%
DvM 2.4% 0.6% 0.2% 4.7% 6.8% 7.4% 7.3%
Health total growth 1.8% -1.0% 0.9% 3.6% 4.7% 5.0% 5.0%
North America 6.0% 1.0% 3.0% 1.0% 2.0% 2.5% 2.5%

Europe/ANZ 0.0% 2.7% 3.5% 1.5% 2.0% 2.5% 2.5%
DvM 9.0% 8.6% 8.0% 8.0% 8.0% 8.5% 8.5%
Hygiene/Home total growth 4.3% 3.6% 4.5% 2.9% 3.5% 4.1% 4.2%
Group total 2.9% 0.8% 2.3% 3.3% 4.2% 4.7% 4.7%

26
18 March 2020
Profitability, margins and EPS

Reckitt’s margins fell by 50bp in 2019 but the reduction would have been 150bp had it not been
for a 100bp reduction in variable pay expenses. With gross margins stable and brand equity
investment up 60bp, this margin result actually points to a substantial increase in other SG&A
investment – consistent with our view that Reckitt has already taken substantial steps to
reinvesting in the business (particularly as it did still realise incremental synergies from Mead
Johnson in 2019)
Reckitt 2019 margin bridge
28.0%
1.0% -0.8%
27.0% 26.7% -0.1% -0.6%
26.2%
26.0%
25.0%
Operating margin Gross Margin Increase in BEI Lower variable Increased Operating margin
(2018) remuneration investment/ other (2019)
SG&A
Decline Increase
Source: Company
For 2020 the situation is clear. A combination of £200m extra ongoing investment, a reversal of
the unusually low variable pay awards and £125m of transformation costs will lead to margins
falling by 320-420bp in 2020. We forecast a 380bp reduction 22.4%.
Following on from this we anticipate modest underlying expansion in the subsequent years,
albeit 2022 will benefit from the c£125m of transformation costs incurring in 2020 and 2021
dropping out. As Reckitt’s top line gathers pace we look for margin expansion in the 40-50bp
annual range, allowing the group to reach the low end of its 7-9% annual EPS growth target. By
this stage there could be potential for capital returns to supplement the EPS growth but this is
not factored into our estimates.
Further down the P&L, Reckitt benefited in 2019 from unusually low net interest and tax,
something which will also reverse in 2020. When combined with the steep margin reduction,
earnings are set to fall by around 20% in 2020. When adjusted for non-recurring tax/interest
benefits in 2019 and ‘two-off’ transformation costs, the fall would be closer to 10%.
Reckitt key forecasts changes

__________ FY20E___________ __________ FY21E ___________ __________ FY22E ___________
New Old Diff. New Old Diff. New Old Diff.
Sales 12,790 12,916 (1.0%) 13,208 13,355 (1.1%) 13,703 13,896 (1.4%)
EBITDA 3,322 3,614 (8.1%) 3,475 3,776 (8.0%) 3,802 4,002 (5.0%)
EBITDA margin 26.0% 28.0% (201)bps 26.3% 28.3% (196)bps 27.7% 28.8% (106)bps
EBIT 2,862 3,228 (11.3%) 3,002 3,378 (11.2%) 3,314 3,593 (7.8%)
EBIT margin 22.4% 25.0% (261)bps 22.7% 25.3% (257)bps 24.2% 25.9% (167)bps
HSBC PBT 1,980 2,236 (11.5%) 2,097 2,372 (11.6%) 2,351 2,559 (8.1%)
HSBC EPS (dil.) 279.3 312.9 (10.4%) 295.1 329.9 (10.6%) 329.9 354.8 (7.0%)
Source: HSBC
Based on the heavier investment than previously factored in, our EPS estimates fall by
7.0-10.6%, with the 2022 reductions lower as transformation costs fall out the P&L:
27
18 March 2020
 2020e from 311.9p to 279.3p (-10.4%)

 2021e from 329.9p to 295.1p (-10.6%)
 2022e from 354.8p to 329.9p (-7.0%)
As we discuss in the following sections, the gradually reducing EPS effects over time mean that
implications for our fair value are more limited than the EPS reductions.
Reckitt Benckiser divisional forecasts

Year to December, GBPm 2018 2019 2020e 2021e 2022e 2023e 2024e
Divisional data
RB Health total sales 7,761 7,815 7,686 7,955 8,283 8,650 9,034
RB Hygiene Home total 4,835 5,031 5,104 5,252 5,420 5,623 5,836
Group sales 12,597 12,846 12,790 13,208 13,703 14,273 14,870
RB Health total sales 1.8% -1.0% 0.9% 3.6% 4.7% 5.0% 5.0%
RB Hygiene Home total 4.3% 3.6% 4.5% 2.9% 3.5% 4.1% 4.2%
Group organic sales growth 2.9% 0.8% 2.3% 3.3% 4.2% 4.7% 4.7%
RB Health total sales 2,213 2,088 2,006 2,115 2,253 2,418 2,521
RB Hygiene Home total 1,156 1,279 856 886 1,061 1,135 1,290
Group operating profit (pre- 3,369 3,367 2,862 3,002 3,314 3,553 3,812
restructuring)
RB Health total sales 28.5% 26.7% 26.1% 26.6% 27.2% 27.9% 27.9%
RB Hygiene Home total 23.9% 25.4% 16.8% 16.9% 19.6% 20.2% 22.1%
Group operating margin (pre- 26.7% 26.2% 22.4% 22.7% 24.2% 24.9% 25.6%
restructuring)
Likely resilience should demand weaken unexpectedly

We are firmly of the opinion that Reckitt’s category mix substantially reduces downside risks to
estimates. Nonetheless, so unusual are current conditions that strains in the supply chain could
prevent Reckitt from making sales it otherwise would have expected to. Even if this is the case,
we still regard risks to our estimates as limited.
 A 5% reduction in FY sales versus our forecasts (which we regard as an extreme outcome)
would lead to turnover falling around GBP650m
 Based on 60% gross margins, the effect on drop-through profits would be 13.6% of 2020
operating profits
 Yet, given our belief that any sales shortfall of such magnitude would primarily be supply-
related, Reckitt would likely be able to partially compensate through reduced trade
promotions/discounts
 Hence the likely risk to estimates is more in the high single-digit to 10% range.
Cash flow and balance sheet considerations

Reckitt’s acquisition of Mead Johnson temporarily took net debt to approaching GBP15bn but
the sale of its Food business in H2 2017 reduced this to around GBP11bn. However, it has
been stubbornly in this level since the end of 2017 as a combination of foreign exchange effects
and the DOJ settlement offset free cash generation. Net debt/EBITDA has also not come down
as profits have not grown.
Based on our 2020 forecasts, we project a net debt/EBITDA of 3.1x, taking into account the
extra investment and its effect on profits. Certainly this is higher than we like to see but feel that
it is manageable in the context of the stable demand we expect to see for Reckitt’s products.
Over the coming two years we look for Reckitt’s leverage to reduce to nearer 2x through the
combination of FCF and gradually improving EBITDA off the 2020 base.
28
18 March 2020
Valuing Reckitt
When assessing the upside in Reckitt’s shares, we take two approaches. The first is a
straightforward DCF (from which our target price is derived) and the second is to evaluate how
Reckitt trades in relation to its consumer staples peers.
Our DCF fair value (discussed in the box on page 30) is GBp6,800. With 28% implied upside to
the current share price this suggests there is clear absolute value in the shares. Critically, with
Reckitt having made the big decisions on how much it needs to reinvest and current demand
likely to be strong, we think numbers are as well underpinned as they can be in the
circumstances.
The second issue is Reckitt in the context of its peers. As the graph below illustrates, Reckitt is
trading around 10% below the 20-year average P/E relative to its European consumer staples
peers. Having reached a low in the second half of 2020, recent months have seen a material re-
rating – reflecting a combination of optimism over the recovery plans plus the effect of estimate
cuts as the scale of investment became apparent (which were implicitly being priced in
beforehand).
Reckitt P/E versus European Consumer Staples, last 20 years
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
Jul-01
Jul-03
Jul-05
Jul-07
Jul-09
Jul-11
Jul-13
Jul-15
Jul-17
Jul-19
Mar-00
Nov-00
Mar-02
Nov-02
Mar-04
Nov-04
Mar-06
Nov-06
Mar-08
Nov-08
Mar-10
Nov-10
Mar-12
Nov-12
Mar-14
Nov-14
Mar-16
Nov-16
Mar-18
Nov-18
Mar-20
Reckitt/European Staples Twenty year average
Source: HSBC, Refinitiv Datastream
Beside this, the element of one-off transformation costs incorporated in our 2020 numbers mean
that earnings would be c4% higher if these were stripped out. Thus, the discount is closer to 15%
when adjusting for this item (which we think Reckitt could easily have treated as non-recurring).
At the same time, off the (lowered) 2020 base, Reckitt should deliver virtually the fastest annual
EPS growth in our European Food & HPC coverage, behind just Beiersdorf.
European Food & HPC EPS growth 2016-24e

EPS growth 2016 2017 2018 2019 2020e 2021e 2022e 2023e 2024e Average
(pre-restructuring) 2021-24e
Beiersdorf 7.4% -5.2% 10.0% 4.2% 3.9% 10.7% 9.1% 10.0% 7.0% 9.2%
Danone 5.6% 12.6% 2.0% 8.2% 3.8% 7.4% 4.7% 4.8% 5.0% 5.5%
Henkel 10.0% 9.1% 2.7% -9.6% -11.5% 3.5% 6.9% 4.8% 5.1% 5.1%
L'Oréal 4.6% 3.0% 6.4% 9.3% 7.6% 9.3% 7.5% 6.6% 7.7% 7.8%
Nestlé 2.6% 4.4% 13.2% 9.8% 4.0% 7.7% 7.2% 5.8% 5.5% 6.6%
Reckitt Benckiser 11.2% 10.2% 7.2% 2.8% -20.0% 5.6% 11.8% 8.4% 8.5% 8.6%
Unilever 4.6% 10.5% 5.8% 7.3% 0.4% 2.9% 3.9% 3.6% 3.8% 3.5%
Average 6.6% 6.4% 6.7% 4.6% -1.7% 6.7% 7.3% 6.3% 6.1% 6.8%
Max 11.2% 12.6% 13.2% 9.8% 7.6% 10.7% 11.8% 10.0% 8.5% 9.2%
Min 2.6% -5.2% 2.0% -9.6% -20.0% 3.5% 4.7% 4.8% 5.0% 5.1%
29
18 March 2020
P&G offers a glimpse of the opportunity if Reckitt gets it right

One of the best examples of the potential upside if Reckitt is able to deliver on its plans over the
coming two to three years is Procter & Gamble (PG US, USD108.50, not rated). As the graph
below illustrates, like Reckitt it faced sluggish organic sales growth over a number of years. In
P&G’s case this was mainly attributable to its own difficulties in the Chinese beauty market
alongside increased competition in the razor and blade market.
Yet, as P&G got to grips with these issues and improved its performance in other important
areas e.g. US laundry, its organic growth rate materially improved.
P&G quarterly organic growth rate 2010-19 (calendar quarters)
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0% 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
-2.0%
Quarterly organic growth Four quarter moving annual total

In a sector where organic sales growth is such a critical component of the rating, the marked
acceleration in P&G’s organic sales growth coincided with a material re-rating versus its US
consumer staples peers, as the following graph illustrates. From the range they trading in for
much of the 2015-18 period, they re-rated by 15-20% as the group’s organic sales growth
improved. Should Reckitt deliver a similar improvement in its sales performance we would hope
to see a similar re-rating versus its peers.
P&G rating versus US staples, last 20 years
130%
120%
110%
100%
90%
80%
70%
60%
Jul-01
Jul-03
Jul-05
Jul-07
Jul-09
Jul-11
Jul-13
Jul-15
Jul-17
Jul-19
Mar-00
Nov-00
Mar-02
Nov-02
Mar-04
Nov-04
Mar-06
Nov-06
Mar-08
Nov-08
Mar-10
Nov-10
Mar-12
Nov-12
Mar-14
Nov-14
Mar-16
Nov-16
Mar-18
Nov-18
Mar-20
P&G/US Staples Twenty year average
Source: HSBC, Refinitiv Datastream
30
18 March 2020
Does M&A optionality remain?

One of the other notable element of the revised strategy was his belief that the group should
remain as a single organisation. Under former CEO Rakesh Kapoor the direction of travel was
one of Reckitt heading towards being two separate businesses but all work on the separation
was (almost) immediately paused once the new CEO started.
Linked with a long-term view in the merits of staying whole, there is set to be a greater degree of
co-operation between the business units in areas of commonality e.g. procurement. While we
would not regard this as a reversal of the moves made to date, we sense that some of the
productivity savings being targeted will come from leveraging the combined scale of the group.
So what does this mean for the prospect of a split over the long-term? There are two ways to
consider this. If Reckitt’s strategy is successful and the group returns to consistent growth then
Reckitt will remain in its present form. Yet this will still be a good outcome for shareholders.
If though after several years the group is not achieving the hoped-for results then investor
pressure for a change of tack may increase. As we have noted previously, consumer health
markets remain fragmented and a number of consolidation possibilities exist. Thus, we still
regard the potential split as a source of longer-term optionality should the recovery plan fail to
meet expectations.
31
18 March 2020
Valuation and risks

Valuation Risks to our view
Current price: We base our rounded target price of GBp6,800p (from GBp7,100) Downside risks include (1) greater weakness in the
Reckitt Benckiser
GBp5,300 on a risk-adjusted DCF valuation. In our DCF, we assume a WACC Chinese infant milk formula category; (2) heightened
RB/ LN of 5.9% (from 6.3%). This is based on a risk free rate of 2.5% private label competition, particularly within US OTC;
Target price:
GBp6,800 (previously 3% consistent with lower current discount rates) and (3) unanticipated changes in consumer preferences;
unchanged equity risk premium of 4.9% giving a cost of equity of (4) need for greater reinvestment over-and-above that
Buy Up/downside: 6.8% (previously 7.3%), a cost of debt of 3.0% (unchanged); already communicated; (5) supply chain problems; and
28.3% calculated as a combination of current debt costs with adjustments (6) product safety scares
to reflect the current degree of leverage, and an unchanged beta of
0.88 (the five-year weekly sector average versus the market). Free
cash flow is explicitly forecast over the initial five-year forecast
period and then semi-explicitly forecast for the next five years,
using a combination of structural FMCG growth rates and scope for
margin expansion once existing savings programmes are
completed. The terminal value is based on a constant terminal
growth rate of 0.7%, derived from our structural growth analysis but
reduced by 50bp from 1.2% to reflect the lower long-term growth
inherent in a lower interest rate environment.
Our target price implies 28.3% upside from current levels. On
multiples, the group’s 2020e PE of 19x still offers scope for re-
rating versus peers should the group achieve the targeted pick-up
In growth
Priced at 16 March 2020

Source: HSBC estimates
Companies mentioned in the report

Beiersdorf (BEI GY, Buy, EUR82.82)
Danone (BN FP, Hold, EUR53.96)
Henkel (HEN3 GY, Hold, EUR65.66)
L’Oréal (OR FP, Hold, EUR207.60)
Nestlé (NESN VX, Hold, CHF90.00)
Unilever (UNA NA, Reduce, EUR40.29)
Clorox (CLX US, Not rated, USD174.69)
Colgate (CL US, Not rated, US62.34)
P&G (PG US, Not rated, USD108.50)
Abbott (ABT US, Not rated, USD73.66)
Bayer (BAYN GY, Hold, EUR48.13)
GSK (GSK LN, Buy, GBp1,403)
Johnson & Johnson (JNJ US, Not rated, USD127.13)
Sanofi (SAN FP, Hold, EUR76.60)
Feihe (6186 HK, Not rated, HKD11.66)
Yili (600887 CH, Not rated, CNY27.25)
Ausnutria (1717 HK, Not rated, HKD10.60)
H&H (1112 HK, Not rated, HKD26.95)
Mengniu (2319 HK, Not rated, HKD25.00)
32
18 March 2020
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Jeremy Fialko, CFA and Robert Price
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should
depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that
investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or
relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in
each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating
because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between
5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20%
below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change
in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight,
the potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12
months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was
expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage
points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months
(unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which
we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's
average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however,
volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
33
18 March 2020
Rating distribution for long-term investment opportunities

As of 17 March 2020, the distribution of all independent ratings published by HSBC is as follows:
Buy 53% ( 31% of these provided with Investment Banking Services )
Hold 37% ( 29% of these provided with Investment Banking Services )
Sell 10% ( 23% of these provided with Investment Banking Services )
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current
rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy
= Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial
analysis” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Share price and rating changes for long-term investment opportunities

Reckitt Benckiser (RB.L) share price performance GBp Rating & target price history
Vs HSBC rating history
From To Date Analyst
N/A Buy 27 Jun 2019 Jeremy Fialko
Target price Value Date Analyst
7650 Price 1 8000.00 27 Jun 2019 Jeremy Fialko

Price 2 7900.00 18 Jul 2019 Jeremy Fialko
7150 Price 3 8000.00 31 Jul 2019 Jeremy Fialko
Price 4 7700.00 30 Aug 2019 Jeremy Fialko
6650 Price 5 7100.00 23 Oct 2019 Jeremy Fialko
Source: HSBC
6150
5650
5150
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Source: HSBC
To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please
use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures
HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price date Disclosure

RECKITT BENCKISER RB.L 53.00 16 Mar 2020 2, 5, 6, 7
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 29 February 2020, HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 January 2020, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
34
18 March 2020
and/or paid compensation to HSBC in respect of non-securities services.
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detailed below.
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securities in respect of this company
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capital, calculated according to the SSR methodology.
13 As of 12 Mar 2020, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
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Additional disclosures
1 This report is dated as at 18 March 2020.
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day is indicated in the report.
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35
18 March 2020
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[1141700]
36
Global Consumer Brands & Retail
Research Team
Europe Asia
Consumer Brands & Retail Consumer Brands & Retail Agribusiness

Global Co-Head of Consumer and Retail Head of Consumer Brands and Retail Analyst
Research Equity Research, Asia-Pacific Alexandre Falcao +1 212 525 4449
Antoine Belge +33 1 56 52 43 47 Karen Choi +822 3706 8781 alexandre.p.falcao@us.hsbc.com
antoine.belge@hsbc.com karen.choi@kr.hsbc.com
Analyst
Head of Consumer Staples Research, Analyst Augusto A Ensiki +1 212 525 4915
Europe Jeremy Chen +8862 6631 2866 augusto.a.ensiki@us.hsbc.com
Jeremy Fialko, CFA +44 20 7991 1562 jeremy.cm.chen@hsbc.com.tw
jeremy.fialko@hsbc.com Analyst
Analyst Camila Sarmiento +1 212 525 5901
Analyst camila.sarmiento@us.hsbc.com
Lina Yan +852 2822 4344
Anne-Laure Bismuth +44 20 7991 6587
linayjyan@hsbc.com.hk
annelaure.bismuth@hsbcib.com Analyst
Analyst Santhosh Seshadri, CFA +91 80 4555 2758
Analyst
Selviana Aripin +65 6658 0610 santhosh.seshadri@hsbc.co.in
Andrew Porteous +44 20 7992 4647
andrew.porteous@hsbc.com selviana.aripin@hsbc.com.sg
Analyst Strategist Specialist Sales

Paul Rossington +44 20 7991 6734 Amit Sachdeva +91 22 2268 1240
paul.rossington@hsbcib.com amit1sachdeva@hsbc.co.in David Harrington +44 20 7991 5389
david.harrington@hsbcib.com
Analyst Analyst
Doriana Russo +44 20 3359 5588 Anurag Dayal +91 22 6164 0686 Jean Gael Tabet +44 20 7991 5342
doriana.russo@hsbc.com anuragdayal@hsbc.co.in jeangael.tabet@hsbcib.com
Analyst
Emmanuelle Vigneron +33 1 56 52 43 19 Gaming
emmanuelle.vigneron@hsbc.com Head of Gaming Research, Asia-Pacific
Charlene Liu +65 6658 0615
Analyst charlene.r.liu@hsbc.com.sg
Joe Thomas +44 20 7992 3618
joe.thomas@hsbcib.com Associate
Jessie Lu +852 2996 6570
Analyst jessie.x.lu@hsbc.com.hk
Ali Naqvi +44 20 3359 4068
ali.naqvi@hsbc.com
North & Latin America
Analyst
Robert Price +44 20 3268 4001 Consumer & Retail
robert.h.price@hsbc.com Global Head of Consumer Brands & Retail
Research
CEEMEA Erwan Rambourg +1 212 525 8393
erwanrambourg@us.hsbc.com
Consumer Brands & Retail
Analyst
Analyst Ravi Jain +1 212 525 3442
Bulent Yurdagul +90 212 3764612 ravijain@us.hsbc.com
bulentyurdagul@hsbc.com.tr
Analyst, Global Consumer & Luxury Brands
Analyst Alexis Cooper +1 212 525 4394
Jeanine Womersley +27 21 674 1082 alexis.cooper@us.hsbc.com
jeanine.womersley@za.hsbc.com
Analyst, LatAm Retail
Analyst Felipe Cassimiro +52 55 5721 2422
Nick Webster +27 11 676 4537 felipe.cassimiro@hsbc.com.mx
nick.webster@za.hsbc.com
Analyst
Analyst Thor Solanes, CFA +52 55 5721 2308
Shaun Chauke +27 11 676 4209 thor.solanes@hsbc.com.mx
shaun.chauke@za.hsbc.com
Food & Beverage
Analyst
Nicholas Paton, CFA +971 4 423 6923 Global Head of Beverages Research
nicholas.paton@hsbc.com Carlos Laboy +1 212 525 6972
carlos.a.laboy@us.hsbc.com
Analyst
Ankur P Agarwal +971 4 423 6558 Analyst
ankurpagarwal@hsbc.com Anthony Bucalo +1 212 525 1729
anthony.bucalo@us.hsbc.com
Alessia Maria Apostolatos +1 212 525 7457

alessia.m.apostolatos@us.hsbc.com

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Reckitt Benckiser (RB/ LN) Equities

Buy: Near-term resilience, long-term opportunity United Kingdom

CEO’s strategy, we retain a fundamental conviction in the long-term vitality of

Disclosures & Disclaimer Issuer of report: HSBC Bank plc

Financials & valuation: Reckitt Benckiser Buy

Financial statements Valuation data

Revenue/IC (x) 0.5 0.5 0.5 0.6 5800 5800

The strategy and why it

 A period of sustained disappointment gives new CEO a blank slate

2020 and the effects of COVID-19

Exposure to COVID-19 sensitive categories by company, % of sales (2019)

Trying to put all of this in a nutshell our views are:

Reckitt Benckiser quarterly moving average organic growth

Laxman Narasimhan’s inheritance

Successive problems reflect underlying issues

Reckitt – ten year margin development

Source: Company filings, HSBC

Reckitt gross margins 2011-19 Reckitt BEI as a percentage of sales, 2011-

Source: Company Source: Company

The diagnostic and the plan

Diagnosing the problems

Reckitt performance quartile versus peers 2019

The proposed fix

Sources of Reckitt's GBP1.3bn productivity savings

Fixed Cost Improvement

35% Commercial Levers

Potential market share benefit through dedicated CMU creation

Top 40 Next 10 Remaining

New Reckitt organisational structure

Hygiene Health Nutrition

Doubling e-commerce business

Closing competitive gaps

RB Health organic growth split

Reckitt’s targets and the path to get there

In the medium-term Reckitt expects to deliver the following:

Why the plan can succeed

Our conviction in the categories

Preference for local brands by category, global average (%) (2017)

Source: Nielsen Global Brand Origin Report

Preference for local brands byThis

Ranked local brand preference by company (2017)

Source: HSBC, Nielsen, Euromonitor

Categories exhibiting additional switching costs

Mead Johnson/Reckitt IFCN organic growth 2014-19

Organic growth rate (%) Quarterly MAT (%)

Source: HSBC, company data

Going into greater detail on the writedown, Reckitt cited:

 Disruption to the Hong Kong cross-border trade

As much as the writedown reflects poorly on the acquisition, it is a historical adjustment

Number of births in China 2000-19 (m)

Source: China National Bureau of Statistics

Market share of leading China milk formula players 2014-19

Growth of China sales - listed milk formula companies

US milk formula market shares 2010-19 (%)

Number of US births and YoY change, 2010-18

4,100,000 1.4% 2.0%

Number of births Growth rate (%)

US six month breastfeeding rates

30% 24.9% 24.9% 25.4%

Rest of the World

Other Latin America