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The Surprising Buy Case For Reckitt Benckiser Group plc

Today I am looking at an eye-opening reason why stunning growth in key regional markets are set to drive shares in Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) higher.

Developing market growth rates to sail higher

Reckitt Benckiser — which operates across 200 countries across the globe — has identified 16 so-called ‘Powermarkets’ from where it can turbocharge earnings, a strategy that is increasingly paying off in huge dividends for the Slough firm.

The business announced in July’s half-yearly report that group net revenues advanced 7% in the first six months of 2013, to £4.99bn, while like-for-like growth ticked 6% higher from the corresponding 2012 period. These improved revenues drove adjusted operating profit 3% higher to £1.16bn.

And the financial report reiterated the galloping progress that Reckitt Benckiser continues to make in emerging markets. Revenues from Europe and North America (ENA), on a constant currencies basis, nudged just 4% higher in January-June, to £2.45bn. By comparison, turnover from its so-called ‘LAPAC’ region — or Latin America, Asia Pacific, Australasia and China — leapt 13% over the same period to £1.28bn. Revenues from RUMEA (Russia, the Middle East and Africa) rose by a more modest 5% to £703m.

Sales from these lucrative emerging markets now account for 44.8% of group revenues, up from 44.2% in the first half of 2012. By comparison, group sales from Reckitt Benckiser’s traditional Western Markets fell to 55.2% in January-June from 55.8% previously.

The household goods giant’s aggressive drive into developing markets is helped by the quality and stellar reputation of its so-called ‘Powerbrands.’ From health products such as Nurofen and Durex, kitchen staples like Finish and Calgon and home cleaning and maintenance labels Dettol and Air Wick, Reckitt Benckiser boasts an enviable stable of go-to products that can be found throughout most homes.

Reckitt Benckiser has also been extremely active on the M&A scene in recent times to build exposure to lucrative growth markets, and has spent £413m in China and Latin America alone over the past year to expand its presence in these areas.

And just this week, group head Rakesh Kapoor hinted that more acquisitions could be just around the corner. The chief executive commented at the Reuters Consumer and Retail Summit that he expects the highly fragmented consumer health industry to  undergo waves of consolidation in the coming years, and that Reckitt Benckiser has the spending power to be a significant dealmaker. I fully expect the company to make good on this statement, particularly in emerging markets in order to supplement already healthy organic growth rates.

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> Royston does not own shares in Reckitt Benckiser.