Interactive Investor

ii view: high-flying Haleon disappoints

3rd May 2023 11:58

by Keith Bowman from interactive investor

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A diversity of brands and geographical markets, with strong cashflows and a focus on reducing debt. Buy, sell, or hold? 

drug pharma pill tablet haleon 600

First-quarter update to 31 March  

  • Revenue up 13.7% to £2.99 billion
  • Organic revenue growth of 9.9%
  • Adjusted operating profit margin down 0.9% year-over-year to 23.1%

Guidance:

  • Continues to expect full-year organic revenue growth towards the upper end of its 4-6% range 

Chief executive Brian McNamara said:

"The new year has started well, and I am particularly pleased that we delivered a healthy balance of positive volume mix and price in the first quarter; demonstrating the strength of the brand portfolio combined with exceptional execution across our markets.

“Looking ahead, I remain excited on the potential of this business and the opportunities ahead, and confident that the quality of our portfolio, our strategy and disciplined capital allocation will enable Haleon to successfully deliver on all medium term guidance."

ii round-up:

Consumer healthcare company Haleon (LSE:HLN), maker of Sensodyne toothpaste and Panadol painkillers, today detailed quarterly earnings which missed City estimates as higher costs squeezed profit margins. 

First-quarter adjusted earnings of 4.2p per share compared with analyst forecasts of 5.2p, with the profit margin year-over-year falling 0.9% to 23.1%. That's blamed on higher standalone costs following its July 2022 separation from former owner GSK (LSE:GSK)

The FTSE 100 company's share price fell by more than 3%, having come into this latest news up around 7% year-to-date. That’s similar to personal care and soap maker Unilever (LSE:ULVR) and compares with a 3% gain for the FTSE 100 index itself. 

The first-quarter update also follows a recent interview with a Pfizer Inc (NYSE:PFE) executive. They suggested the drug giant would start selling down its 32% share stake in Haleon within months.   

Haleon's product portfolio spans the five categories of Oral Health, Pain Relief, Respiratory Health, Digestive Health and Other, and Vitamins, Minerals and Supplements (VMS). 

Organic sales and stripping out acquisitions for the quarter rose 9.9%, aided by a 7.1% increase in product prices. 

Organic sales for the full year are still expected to come in at the upper end of a 4-6% range, although that's down from 9% growth over in 2022. 

First-half results are scheduled for 2 August. 

ii view:

Headquartered in Weybridge, Surrey, Haleon operates in more than 170 markets. Its many brands include Aquafresh, Contac, Voltaren, Centrum and Nicorette. Sales of Oral Health products generated its biggest slug of sales in 2022 at 27%, followed by Pain Relief at 24%, Digestive Health and other at 19%, VMS at 16% and Respiratory Health 14%. Geographically, both North America and Europe and Latin America account for almost 40% of sales, with Asia Pacific making up the balance of just over 20%.  

For investors, a highly uncertain economic outlook, including heightened interest rates and an ongoing cost-of-living crisis for consumers, cannot be ignored. Costs broadly for businesses remain elevated, consumers may still downgrade to cheaper supermarket brands, while potential sales of sizeable shareholdings held by both Pfizer and GSK could potentially 'overhang' Haleon's share price. 

More favourably, a diversity of product categories and geographical regions allows any challenges for one to potentially be offset by another. A management focus on cost reduction remains, free cashflows are expected to help the business reduce debt and potentially increase the dividend, while recent increases in product prices suggest some pricing power.  

Elevated inflation and cost headwinds have generated some caution. However, the shares have performed well since September, and Haleon remains a high-quality business with exposure to potentially defensive healthcare products.

Positives: 

  • Diversity of product and geographical region
  • Targeting cost savings of up to £300 million over the next three years

Negatives:

  • Uncertain economic outlook
  • Exposure to currency movements

The average rating of stock market analysts:

Buy

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