Sunday share tips: Reckitt Benckiser, Xeros Technology
By Josh White
Date: Sunday 22 Jul 2018
(Sharecast News) - In the Sunday Times' 'Inside the City' column, Sabah Meddings was looking at consumer products giant Reckitt Benckiser - and the abandoning of a potential £15bn takeover of Pfizer's consumer lines.
Earlier this year, Reckitt chief Rakesh Kapoor was on the verge of securing the portfolio from the US drug giant, which included global brands such as Advil painkillers and Centrum vitamin supplements.
Kapoor was forced to ditch the deal, however, after investors became more wary of the cash call and pile of debt that would have been necessary to buy it.
Shareholders were also apparently concerned at the prospect of another massive integration, just a year after Reckitt took over US infant food giant Mead Johnson.
Meddings said that in hindsight, walking away from the Pfizer prospect was a smart decision, with Reckitt avoiding the expensive deal and Pfizer instead splitting the business into three divisions.
Shareholders in Reckitt Benckiser, however, were still suffering a string of disappointments, with the Mead Johnson acquisition sending profit margin forecasts south, and sales being affected by negative currency movements, a cybersecurity breach, and a flop of a footwear launch.
The series of corporate stumbles have led to a number of investors apparently questioning the value of £12.7m-a-year Kapoor, especially given the firm was enjoying 6% like-for-like revenue growth as recently as 2015.
There are also growing concerns that a recently-announced healthcare products tie-up between Amazon, Berkshire Hathaway and JP Morgan could see the internet giant encroaching on Reckitt's territory.
Jeff Bezos' retail and technology empire has also recently made moves to gobble up prescription medicine distributor PillPack.
Meddings did note that Reckitt remained "strong" in the face of these challenges, however, with its shares closing on Friday ar 6507p, up 14.5% from their low in April.
That was a better performance than competitor Unilever, which advanced 11.8% over the same timeframe.
Reckitt Benckiser will release its second-quarter numbers this coming Friday, with analysts predicting a 2.9% rise in like-for-like sales, and total revenues of £2.9bn.
Profit performance will have been hampered by costs over Reckitt's recent decision to split itself into two divisions - home and hygiene, and healthcare - however.
Could Kapoor's decision to report each division's numbers separately lead to a formal break-up?," asked Sabah Meddings.
"After all, with [GlaxoSmithKline] looking at separating its consumer and pharmaceuticals divisions, it seems demergers are back in vogue."
Meddings said that, if Reckitt decided to find a buyer for its hygiene business, it could come back for Pfizer's consumer goods business at a lower price and with more firepower.
"Perhaps, in a few years, Reckitt's time will come."
Over in the Mail on Sunday, Joanne Hart was combining two of her apparently favourite things - technology and the AIM market - and focussing her attention in the 'Midas' column on Xeros Technology.
The firm has apparently developed a way to reduce water usage in washing machines by up to 80%, and recently signed a deal with Chinese appliance giant Jiangsu Sea-lion Machinery Group.
Its shares were sitting at 69p on Friday, with Hart claiming they should rise as it completed more deals with commercial and domestic appliance makers around the globe.
Xeros was a spin-out from Leeds University, becoming its own entity in 2006, and spending most of the last 12 years working on its technology without focussing too much on the cashflow side of things.
Central to its technology are what it calls 'XOrbs' - small polymer beads which last a thousand cycles, and mechanically remove dirt, stains and bleeding dyes.
As a result, water usage is reportedly substantially lowered, with less detergent required and the machine being able to effectively wash at lower water temperatures, too.
Xeros even claims that clothing and other fabrics last longer, with garments requiring less ironing when washed with its 'XOrbs'.
While the benefits seem apparent, Hart said the big manufacturers take a lot of convincing, with Xeros spending years now selling washing machines itself with the technology built in.
The Hilton Hotel in Los Angeles' Universal City is now using the machines, and has reported a significant reduction in its water bills, detergent costs and machine replacement rates.
At its core, however, Xeros is a company focussed on its technology, rather than the nuances of designing and distributing the washing machines themselves, so chief executive Mark Nichols was steering it towards a licensing model.
The transaction with Sea-lion was the first of that sort of contract, with the deal unveiled last week at a laundry exhibition in China.
Xeros' board was anticipating more similar deals this year.
It was also looking at other more niche applications for the XOrbs technology, with it apparently helping expensive firefighting uniforms last longer, and tanneries to use less water in leather production.
Nichols was also working with jeans manufacturers to see if XOrbs had useful applications in the production of denim.
"Xeros joined AIM in 2014 at 123p," Hart said, adding that the shares hit 300p in 2015 and again last year.
"They have slumped since then, as shareholders have grown tired of waiting for the business to deliver licensing deals and move towards profitability.
"Profits are unlikely to materialise for the next three years but new deals should be forthcoming, and with increasing frequency," she explained.
"At 69p, the shares are a buy for adventurous, long-term investors keen to back a British technology pioneer."
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