Interactive Investor

What lies ahead for Glaxo spin-off Haleon?

1st March 2022 16:17

Graeme Evans from interactive investor

The pharma giant is demerging from its consumer healthcare division in July. Here’s what investors can expect.

GlaxoSmithKline (LSE:GSK) has given its investors a taste of what to expect from their new stake in Sensodyne-to-Panadol business Haleon, ahead of a demerger this summer.

At the start of a four-hour presentation yesterday, Glaxo chief executive Dame Emma Walmsley (pictured) said July's long-awaited separate listing for the consumer healthcare division represented the most significant corporate change for the company in 20 years.

At £40 billion-plus, the valuation of the business will be large enough to rank among the 20 biggest stocks in the FTSE 100 index. For Glaxo shareholders, Dame Emma said it would unlock value and strengthen prospects “through two new distinctive equity choices”.

She added: “Both of these companies have the opportunity for large-scale positive, human-health impact, and both of them offer compelling outlooks for growth and attractive returns.”

The presentation revealed that Haleon is expected to deliver annual organic sales growth of 4-6% in the medium term, as well as “moderate sustainable” expansion in operating margins. The initial dividend is expected to be at the lower end of the 30-50% payout ratio range.

Assessing a future valuation for Haleon, analysts at UBS say there are parallels with their estimate for Nestle on 23.5 times 2023 earnings. However, they see potential advantages for Haleon in terms of a higher gross margin and lower exposure to commodities than its peers.

They add: “On balance we expect the various pushes and pulls leave room for some upside to views. We think pure play consumer healthcare will have some scarcity value and rising inflation could make lower exposure to commodity pricing look attractive.”

UBS says 2022 could be a strong year for Haleon, as a return to normality following historically weak cough/cold seasons due to the Covid pandemic becomes visible. After that, however, things look less clear, especially as spend on operating costs is likely to ramp up by more than sales.

The business, whose other leading brands include Centrum and Voltaren, has been enhanced in recent years by the additions of the Novartis consumer health portfolio in 2015 and the operations of Pfizer in 2019. It achieved £9.5 billion of sales in 2021.

UBS has a “neutral” recommendation and price target of 1,680p on the whole of GlaxoSmithKline, whose shares today rose 10.2p to 1555.6p following the presentation. The stock is up 30% in the past year, aided by a renewed focus on the consumer healthcare arm after Unilever made an unsuccessful £50 billion takeover approach earlier this year.

The separation will lead to a windfall payment of £7 billion to the remaining Glaxo business, which it plans to use to strengthen its balance sheet and step up innovation.

At recent results, Glaxo reported “a strong pipeline” of 21 vaccines and 43 medicines, many offering potential best or first-in-class opportunities for patients. Its guidance for 2022 points to sales growth of between 5% and 7% at constant exchange rates and an operating profit rise of between 12% and 14%.

The ‘New GSK’ business is expected to adopt a progressive dividend policy targeting a payout ratio equivalent to about 40%-60% of earnings, starting with 45p a share in 2023. A circular on the demerger plan will be sent to shareholders in June, alongside a prospectus in connection with the listing of Haleon.

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