Haleon (LSE:HLN) shares were only listed on Monday, but are down around 10% from the 330p listing price.
The firm will operate as a consumer healthcare business after the demerger with GlaxoSmithKline, which will now focus on vaccines and drugs.
Priced at 330p a share, Haleon was given a market valuation of £30.5bn, making it the largest listing since the £36.7bn initial public offering of Glencore in 2011.
So, what is Haleon, and should I consider it for my portfolio?
What is it?
Haleon is now the largest consumer healthcare business in the world. It’s poised to join the FTSE 100, due to its sizeable market-cap. In fact, the valuation puts it among the top 20 companies listed in the UK.
The decision to split the two businesses came after a period of underperformance for GSK.
GSK suggested that the two operations would perform better separately. After all, one is a fast-moving consumer goods (FMCG) firm, the other is a pharmaceutical business that spends years researching and developing a drug before deciding to either drop the project, or seeking regulatory approval.
Outlook
One concern for investors is that a big slice of GSK’s debt pile has been passed on to Haleon. The FMCG business will start life with a net debt-to-cash-profits (EBITDA) ratio of around four. Meanwhile, GSK will be left with an EBITDA ratio of two.
This is understandable given Haleon will require less capital and should generate more stable revenues over time, compared to GSK. More stable income makes it easier to service the debt pile. However, it does mean that Haleon starts trading with a need to cut debt.
In GSK’s most recent report, the consumer healthcare business that’s now Haleon performed well. Sales rose 14% to £2.6bn, with strong growth across all categories. International sales rose 17% to £1.1bn, which should improve further in the months to come given the weakness of the pound. The group noted very strong consumer sales momentum, claiming it signals a new period of sustained growth.
Is this stock right for my portfolio?
Haleon is one of the few companies to list that already has a leading market position, with a portfolio of household names such as Sensodyne and Centrum vitamins. This gives it the “defensive” qualities that should serve it well if the economy takes a downturn. Strong brands are good for stability.
But I’m not sure how much growth can be generated here. The global over-the-counter market is growing at just 2%-3% annually. Meanwhile, Haleon’s margins are already strong. Reckitt Benckiser’s consumer health business has a profit margin of 21.8% versus Haleon’s 25.9%.
As an investor, it’s also worth noting that the dividend yield is forecast to be lower relative to its GSK level.
So, I’m actually holding off right now on Haleon. It’s definitely one to watch, but I’m risk-averse and I’d rather see some evidence that the demerger is benefiting the company before I buy.
