Interactive Investor

Star stocks Glaxo and Burford rally and could go higher still

19th December 2018 14:11

Graeme Evans from interactive investor

At last, some good news for Graeme Evans to report! Both GlaxoSmithkline and AIM's largest company Burford Capital are soaring ahead of the Christmas break.

Landmark sessions for blue-chip heavyweight GlaxoSmithKline and AIM-listed equivalent Burford Capital gave investors much-needed respite today from the recent torrent of grim stockmarket news.

Glaxo's planned consumer healthcare joint venture with Pfizer finally ends years of shareholder pressure for a break-up, with the pharma giant pledging to spin-off the combined business within three years.

Legal funding specialist Burford, which is now the largest stock on AIM by market cap following today's 18% share price surge, has unveiled a strategic relationship with a sovereign investor to help facilitate US$1.6 billion in litigation finance investments over four years.

Shares in both companies were sharply higher, having already done better than most in terms of weathering the difficult market conditions of 2018.

Today's 7% rise means high-yielding Glaxo is now sitting on an impressive 18% share price rise for the year-to-date as investors warm to the strategy of CEO Emma Walmsley, who took charge in April last year.

There was also reassurance that the changes will not threaten the precious dividend, which has paid 80p a share since 2015 and will now continue to do so for this year's results and next year's. Glaxo currently yields more than 5%.

Walmsley added:

"Ultimately, our goal is to create two exceptional, UK-based global companies, with appropriate capital structures, that are each well positioned to deliver improving returns to shareholders and significant benefits to patients and consumers."

That message comes too late for fund manager Neil Woodford, who urged Walmsley's predecessors, Sir Andrew Witty and Jean-Pierre Garnier, to consider that the sum of Glaxo's parts was significantly greater than the whole.

The company replied that being diversified was a strength with synergies between business units. Fearing a dividend cut, Woodford's patience eventually snapped in May 2017 when he ditched the shares he had held for 15 years.

Source: TradingView (*) Past performance is not a guide to future performance

The approach from Walmsley now allows Glaxo to step up focus on improving its drugs pipeline, which has been the subject of much attention as the City awaits new blockbuster products in pharmaceuticals and vaccines.

R&D was quickly identified by Walmsley as her number one capital allocation priority, prompting her to walk away from a potentially dividend-busting M&A deal in the auction of Pfizer's consumer healthcare arm.

Having held her nerve, Glaxo now looks to be in a position to own a 68% stake in an enlarged business that will combine Glaxo's Sensodyne, Voltaren and Panadol brands with Pfizer's Advil, Centrum and Caltrate.

The joint venture, which is due to be sealed in the second half of 2019, will attract a market share of 7.3%, compared with the nearest rival at 4.1%. The business will have combined sales of nearly £10 billion.

Burford AIMs high

Burford Capital, which helps companies to manage legal costs and risk, has surged up the AIM rankings in recent years and is now worth over £3.3 billion, placing it just ahead of Hutchison China Meditech.

Shares, which have suffered a wobble since October, were up 18% today after it announced the tie-up with the wealth fund creating a litigation finance pool of US$1 billion. Burford's commitment is $333 million, but with the opportunity to realise 60% of investment profits.

Source: TradingView (*) Past performance is not a guide to future performance

Numis Securities said this and other finance arrangements added security to its forecasts and valuation. Following the recent share price weakness, Numis analysts said Burford was at a substantial discount to their target price of 2,300p and good value at 14.1x forecast 2019 earnings, falling to 9.4x 2020 earnings.

Macquarie values the stock at 2,540p. Analyst Neil Welch said: "The group sees its largest market, the US, as underserved and, at its recent capital markets day, set out near-term opportunities in Australia, Germany, Netherlands, Hong Kong and Singapore.

"This response to the structural opportunity Burford has identified remains a strong case for outperformance for the shares against the wider sector in our view."

*Horizontal lines on charts represent levels of previous technical support and resistance.

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