Reckitt Benckiser's (RB.) full-year results were almost exactly in line with our above-consensus forecasts, and guidance for 2016 is consistent with our existing forecasts. Therefore, we are unlikely to make material changes to our £59 fair value estimate beyond the impact of the time value of money. Pricing power was again evident in the consumer health segment; this is one of the key sources of our retained narrow moat rating. Nevertheless, we reiterate our thesis that some of the drivers of Reckitt's short-term organic growth rate may be unsustainable in the medium term.
Several consumer product manufacturers have highlighted the rebound in Southern Europe over the past six months
Organic fourth-quarter net sales increased by 7%, significantly more than the 4%-5% growth that larger, more-diversified competitors are achieving. Developing markets, up 12% on a like-for-like basis in the fourth quarter and up 9% in the full year, and consumer health, up 14% in both the fourth quarter and full year, remain the drivers of consolidated sales growth. Several consumer product manufacturers have highlighted the rebound in Southern Europe over the past six months, but Reckitt's performance in Eastern Europe, where it delivered "strong growth", was particularly impressive.
Expect Slower Growth in the Future
There are several reasons to expect slowing in Reckitt's outstanding organic growth rate in the near to medium term. First, the firm benefited from a strong sell-in of cold and flu products ahead of the flu season, which has been fairly poor at the retail level. Second, although Reckitt has several product launches planned for 2016, it will also lap some successful line extensions last year, most notably within Air Wick.
Third, although the 80 basis points of margin expansion in 2015 was impressive, we expect slower margin improvement next year, owing to slightly slower organic growth, and because we believe Reckitt has already realised most of the £150 million in annual efficiencies from Project Su percharge.
With all that said, Reckitt should grow at the high end of its peer group next year, and at a rate consistent with our forecasts for its categories in the medium term. With an above-average sales growth rate, a best-in-class and improving margin profile, and a strong management team, we think Reckitt is a strong business. Nevertheless, we believe investors should wait for a margin of safety before building a position in the shares, notwithstanding the potential for merger activity in the personal-care space.
