Newly listed Haleon is not trying to prove only that it can thrive without Unilever, its would-be acquirer, but also that it is capable of accelerating sales growth, just like the suitor it rebuked.
Haleon, which made its debut on the London stock market yesterday after being spun out of GSK, was slapped with a market value of just over £28 billion by investors. Include the £10.3 billion in debt on the balance sheet and that gives the newly listed group an enterprise value of almost £39 billion, or roughly 14.9 times the £2.61 billion in earnings before tax and other charges forecast by Jefferies, the broker, for Haleon this year.
That forward profit multiple is above that attached to both Unilever and Reckitt Benckiser, a valuation that looks optimistic, too, given the group’s higher leverage and pedestrian sales growth. Haleon is aiming to increase organic sales by between 4 per cent and 6 per cent from this year, broadly in line with the 4.5 per cent to 6.5 per cent range being targeted by Unilever and ahead of the 1 per cent to 4 per cent guided by Reckitt.
Expecting sales to land towards the lower end of that target range over the medium term might be more realistic. Last year organic sales grew by 3.8 per cent, up from 2.8 per cent in 2020. Strip out lower growth and the non-core businesses divested, such as drinks and cosmetics, and the organic growth rate ticked up to 4.4 per cent last year, according to the company.
Haleon was created through a joint venture between GSK and Pfizer, the American drugs powerhouse, in December 2018. Shifting the portfolio towards higher-growth brands has provided a boost to the rate of sales growth. The share of sales driven from the group’s nine multinational power brands — Panadol, Voltaren and Centrum among them, which together have higher revenue growth than the overall company and generally higher gross margins — has increased from 44 per cent in 2015 to 58 per cent last year.
The Pfizer combination has also granted Haleon scale in the United States and China and has launched it into the higher-growth vitamins, minerals and supplements market. Brand strength is a help, but organic growth is hard-won in highly competitive consumer goods markets. In the less mature Asia Pacific region, sales grew by 9.1 per cent organically last year and by 5.7 per cent the year before. But in North America (37 per cent of revenue last year) and the Europe, Middle East and Africa region (41 per cent of revenue), organic growth came in at a mere 1.3 per cent and 3.5 per cent, respectively.
Pressure on consumer spending could well make accelerating sales growth harder. Haleon reckons that volume and price will contribute pretty evenly to achieving its sales growth target, but sales volumes will need to do the heavy lifting, because pushing pricing ahead aggressively would be a challenge, given the pre-existing gap between generic and branded over-the-counter drugs. Small packaging and product sizes mean that commodity costs typically account for only 10 per cent of revenue, but price rises are still set to be above last year’s 2 per cent to offset higher raw material costs.
Sales growth for the consumer healthcare industry is expected to revert to pre-pandemic levels of 3 per cent to 4 per cent, which implies that Haleon would need to take market share in order to achieve its 4 per cent to 6 per cent sales growth target. Haleon says that was a feat it managed during the pandemic, citing 2 per cent consumer healthcare market growth last year, but Jefferies’ analysis of market data puts that growth rate at 4.6 per cent. Haleon’s immaturity makes it even harder to put a finger on what might be possible, with trading over the past two years made less clear by the impact of the pandemic on demand.
Expanding margins beyond the 22.8 per cent recorded last year also could prove tricky, reckons Jefferies, which forecasts margins being flat this year after taking into account higher costs from operating as a standalone company, partially offset by cost savings from the Pfizer acquisition. Cost savings from integrating the Pfizer brands into the existing consumer healthcare business lift the adjusted operating margin from 19.5 per cent in 2019.
A high level of debt makes Haleon even more reliant on pushing forward like-for-like sales, either by getting its products into more homes or launching brands in new markets. In any case, Haleon reckons it has done the heavy lifting in terms of big acquisitions and disposals. The present deleveraging plan allows for one bolt-on deal a year, producing revenue in the £50 million to £100 million range.
Funding dividends to GSK and Pfizer, which retain stakes of 6 per cent and 32 per cent, respectively, has left Haleon with net debt of £10.3 billion on a pro-forma basis at the end of March, or just over four times adjusted earnings before tax and other charges. That puts leverage far above consumer goods peers. The plus side is that about 80 per cent of that debt is at a fixed rate and has an average maturity of eight and a half years. Cash-generation goals mean that a target to reduce leverage to below an — albeit still considerable — multiple of three by the end of 2024 looks achievable.
But the GSK and Pfizer stakes cast a shadow over Haleon’s shares, even if there is a lock-up agreement not to sell until November 10 or Haleon publishing its third-quarter results, whichever happens first. Both companies plan to sell down their remaining shares at some point, which could prompt other investors to cut their holdings in advance.
Cutting leverage is not the only challenging benchmark. The £50 billion value put on Haleon by Unilever this year — part of its takeover approach for the business, when it was still under the wing of GSK — is likely to stick in investors’ heads as a valuation goal. Hitting that any time soon is wishful thinking, not only because of the turmoil enveloping markets: achieving a £50 billion market value would require Haleon to lift cashflow returns to 11.8 per cent over the next decade, according to Veena Anand, an analyst at Canaccord Genuity’s Quest team, which implies 15 per cent sales growth for the next ten years and an operating margin of 30 per cent. In short, very unlikely.
Closing the first day’s trading more than 6 per cent down on the 330p initial float price might not seem a win, but it translates into a forward profit multiple ahead of leading UK-listed peers that have lower leverage and a longer track record. Haleon will have its work cut out proving that it deserves such a premium.
ADVICE Hold
WHY A higher forward profit multiple leaves a potential increase in sales already priced into the shares
