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Haleon shares: can they rally post-GSK de-merger?

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Haleon plc [LSE:HLN], a £24.8bn market cap consumer healthcare company, demerged from the global biopharma company GSK plc [LSE:GSK] on the 18th of July. Haleon has just announced double digit organic revenue growth (+11.6%) in their half year trading results. Despite the 13.5% drop from its initial price after demerging, is this stock worth investors’ attention?

Let’s start with the de-merger

On 28 February 2022, GSK announced the demerger of the new company, Haleon, to allow it to better focus on different markets and clients, with 100% focus on consumer health.

In the first half year trading result, the CFO expected Haleon to deliver annual organic sale growth of 4-6%, with a new target of net debt/adjusted EBITDA to be less than 3x by the end of 2024, from up to 4x at demerger. By the end of the week after announcing this, GSK stock dropped 3.6%.

Emma Walmsley, Chief Executive Officer, GSK said: “Through the demerger we will unlock the potential of both GSK and Haleon … we believe Haleon will be a strong, highly successful growth-orientated company.”

Brian McNamara, Chief Executive Officer Designate, Haleon also added this: “We will show investors how our world-class portfolio of brands, our competitive capabilities and a compelling strategy to outperform … and a sustainable financial performance that can drive investment in growth and deliver attractive returns to shareholders.”

Haleon is a ‘power brand’ stock

Haleon is the global leader in each of the major categories in which it operates – Therapeutic Oral Health; Vitamins, Minerals and Supplements; Pain Relief; Respiratory Health; and Digestive Health. The portfolio comprises global power brands such as Sensodyne (number one sensitivity toothpaste in the world), Panadol, Advil and Voltaren (pain relief), Theraflu (cold relief), Otrivin (nose congestion relief), and Centrum (world’s number one vitamins).

These are called the ‘power brands’ by Haleon, which currently drive 60% of their sales and account for 80% of the growth. Also, the company has iconic, local strategic brands such as TUMS, ENO, ChapStick and Emergen-C, as well as Fenbid, the primary OTC systemic pain relief brand in China, Dr Best, the leading manual toothbrush in Germany, and GrandPa the No.1 pain relief brand in South Africa.

This power brand names portfolio contributes to a nearly £10 billion in sales. They made Haleon the leader in consumer healthcare in the US, as well as the number one multi-national consumer healthcare business in China. Haleon also has a strong presence in the emerging markets, such as India, Latin America, the Middle East, and Africa.

What is Haleon’s current growth strategy?

Haleon follows four key elements in their strategy:

1. Drive penetration growth across the Haleon portfolio. Continue to drive further market share gain and category growth in all five global categories through brand innovation and reaching new consumers with Haleon products.

2. Capitalise on new and emerging growth opportunities, including growing e-commerce sales, expand brand and portfolios including new product developments and accelerating consumer trends.

3. Strong execution and financial discipline. Haleon’s margin has expanded despite cost inflation, which tells us about how they are becoming more cost sensitive with production.

4. Running a responsible business with a strong commitment to tackling environmental and social barriers. Haleon recently joined Zero100, a community to accelerate progress on digitisation and decarbonisation.

In 2021, Haleon’s R&D investment was £257 million, representing 2.7% of sales, which is competitive in the industry, according to GSK.

Behind the numbers on Haleon

Haleon did a great job delivering revenue growth even in the era of tough market conditions: high interest rates, higher costs in the supply chain, and materials inflation were all headwinds. So how is Haleon doing in terms of operating cash, debt, equity, and growth outlook?

Haleon’s H1 revenue grew 13.4% to £5,188m, organic revenue growth was up11.6% with 3.7% price and 7.9% volume/mix, H1 adjusted operating profit increased 21.2% to £1,191m, up 15.5% at constant currency (CER), H1 Adjusted operating margin 23.0%, up 90bps (CER) and 150bps at reported rates. Free cash flow went up to £553m from 2021’s £364m.

Following its demerger, Haleon had net debt of £10,707m. Haleon is bearing a lot of debt, a big proportion of which – £9,918m – are long term borrowings, with only £332m short term borrowing, which are well covered by cash and cash equivalents £1,334m.

The company had strong cash generation during the first half which underpins Haleon’s confidence in its ability to de-lever rapidly to less than 3x net debt/adjusted EBITDA by the end of 2024. Aligning with this statement, Haleon repaid £750m through a combination of operating cash flow and proceeds from commercial paper issuance.

Revenue is forecast to grow 5.4% p.a. on average during the next three years, with 6-8% organic growth for 2022, compared to a 3.9% growth forecast for the Personal Products industry in the United Kingdom.

Trading analysis

Haleon is trading at a 17.5x P/E ratio, comparing to the personal product industry P/E average of 17.4x, this indicates it is trading at around the fair value. Haleon is trading at a 0.9x P/B ratio, indication a slight undervalue to the stock.

According to 13 analysts who currently follow the company, the average one year target is at £3.32, a 23.5% upside. Also, according to Macquarie Group research, a new entity should have a six month grace period before the stock price can stabilise, which might explain why the Haloen share price have been descending recently.

The Haleon management team were extremely positive about their first term performance and were happy that two thirds of the business has gained or maintained market share. The strong free cash flow is evidence of them de-levering, and delivering a confident 4-6% growth guidance, reinforced by the strong growth momentum.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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