Investors are laser-focused on the top line when it comes to the largest consumer goods companies. It’s partly an acknowledgement of the challenges that stem from trying to push forward sales in mature and saturated markets.
Haleon, therefore, might feel irked that a boost to its full-year sales forecast, from close to 6 per cent to between 7 per cent and 8 per cent, scored zero credit with the market, indeed even leading to a 2 per cent fall in the shares.
Investors also want to see how companies such as the former consumer health division of GSK can translate sales into operating leverage and create a bigger impact on the bottom line. Haleon hasn’t helped itself with opaque profit guidance. The company behind Panadol and Sensodyne has switched from noting its margin to absolute adjusted operating profit growth as a gauge for progress. It had told investors to expect a flat margin year-on-year, which would equate to 22.8 per cent. Any margin target was absent at the half-year results. Instead, it told investors to expect operating profit growth of between 9 per cent and 11 per cent. This does translate to an upgrade in profit growth, which would have been closer to 6 per cent. Margins are expected to expand, although it hasn’t given an indication of the magnitude.
The market might want to see more proof of investment behind its brands. Even excluding Russia, advertising and promotion spending was behind the 10.6 per cent rate of revenue growth at 8 per cent. Research and development expenditure lagged further, up by only 2.9 per cent. That could become an issue if its brands continue to lose market share. Over the first half of the year, 55 per cent of its business by value maintained or grew its slice of the market, down from two thirds over the whole of last year.
What Haleon can claim — and what consumer goods rivals such as Unilever and Reckitt Benckiser cannot — is genuine demand growth. Sales volumes were 2.9 per cent higher, better than the 2.7 per cent that analysts had expected and despite average price inflation of 7.5 per cent. Only its vitamins business was in negative territory as far as organic revenue goes, down 0.5 per cent, after lapping a Covid period when consumers stocked up on cold and flu treatments and immunity-boosting supplements. The sale of Lamisil is also set to help to reduce leverage slightly faster than anticipated, with net debt to decline to below three times adjusted earnings before taxes and other charges during next year.
The shares have risen above the 330p flotation price, which translates to a forward earnings multiple of 17, slightly better than when it was first spun out of GSK in July last year. Note, that is still a discount to London-listed consumer goods companies like Unilever and even further below international rivals like Procter & Gamble and Colgate-Palmolive. They have longer track records on the public markets and are without two complicating factors that sit outside performance.
The first is the potential large liabilities from a wave of American lawsuits alleging that Zantac, an old GSK heartburn drug, caused cancer. Haleon rejected requests from GSK and Pfizer for indemnification and has said it was not a party to any Zantac claims. No provision has been made by the consumer health group in light of any potential costs. The other is upcoming share sales from GSK and Pfizer. Its former parent sold off part of its stake in February, but still has a 10 per cent holding; Pfizer has a 32 per cent chunk of Haleon. Both have signalled their intent to reduce their holdings.
Without sight of a resolution on these fronts, it will prove difficult for Haleon to earn investors’ plaudits.
ADVICE Hold
WHY Potential sales from a leading shareholder and litigation are an overhang
Ibstock
Self-help is the only thing that Ibstock has at its disposal right now. Capacity in the brick manufacturer’s facilities is running at about 70 per cent to 75 per cent, below a norm of 90 per cent, to match reduced demand from the country’s housebuilders. Building inventories meant that it was able to recoup more of the fixed costs within the business.
At least the company is being prudent in setting investors’ expectations: no improvement in sales volumes is expected this year, which would constitute a decline of about 25 per cent. Roughly 60 per cent of revenue is derived from the private housebuilding industry, which drove first-half revenue down by 14 per cent.
Sales to other sectors, such as infrastructure providers, were 15 per cent higher, although that segment accounts only for roughly the same proportion of overall sales. Still, prices remained solid enough.
Not surprisingly, muted demand has been reflected in the valuation of the shares, which trade at just under 11 times forward earnings, at the bottom end of the historical range. It is a bargain basement rating that ignores, first, the acute supply constraints in British brick manufacturing that should ensure sales recover once industry demand does and, second, Ibstock’s own rock-solid balance sheet.
The FTSE 250 group is in the middle of a spending programme that will increase capacity over the medium term. That includes the redevelopment of brick factories in the West Midlands that will produce the UK’s first externally verified carbon-neutral bricks, due to come into production at the end of this year. Total capital expenditure will be £55 million, before falling to £30 million next year.
Even after that capex is in the ground, leverage should remain at the lower end of the target range at 0.9 times adjusted earnings. The group aims to pay a dividend covered twice over by earnings, a target completed during the first six months of the year. Analysts think the cash return will amount to 8.38p a share this year, still leaving the shares offering a potential yield of 5.3 per cent. That is enough to compensate investors for patience.
ADVICE Buy
WHY Shares offer a generous yield and recovery potential
