Haleon (LSE:HLN) shares didn’t perform particularly well during the company’s first week as a separately listed company after its split from GSK. The listing was long-awaited, and was the largest listing in Europe for over a decade. Haleon is now the world’s largest standalone consumer health business.
The demerger was touted as being positive for both the new-look GSK (formerly GlaxoSmithKline) and Haleon, and both businesses are clearly very different from each other.
So, is Haleon primed to soar following the demerger?
Valuation
Priced at 330p a share, Haleon had a market valuation of £30.5bn. The sale raised plenty of money for GSK, but it’s far less than the £50bn that Unilever was willing to pay earlier in the year.
Haleon’s debut price was largely in line with market expectations, but its enterprise value is around £40bn, taking into account the company’s £10bn in debt.
So I might be wondering why GSK didn’t accept Unilever’s offer.
Having made around £9.6bn in 2021, Haleon is forecast to achieve revenues of around £10.7bn in 2022, according to Barclays analysts. This is particularly impressive considering GSK’s consumer health business only brought in £4bn in 2014.
The forward price-to-earnings ratio is around 18 — more than the FTSE 100 average — given Barclays’s EPS forecast of 16.6p for 2022.
And Haleon is poised to generate above-market annual organic revenue growth of 4% to 6% in the medium term, according to GSK.
Outlook
Credit Suisse initiated coverage of Haleon at “outperform” with a 368p price target.
The stock clearly has some upside when I consider the enterprise value and the price Unilever was willing to pay. It’s even feasible that Unilever could attempt to buy out the company again, with the share price considerably lower than what it had offered (but its own shareholders might not be happy at that prospect!)
Recent performance has been positive too. Haleon sales rose 14% to £2.6bn as of GSK’s last report, with strong growth across all categories. International sales rose 11%, which should be good for the balance sheet as the pound depreciates.
Haleon also has some defensive qualities, namely the strength of the brands it owns, such as Sensodyne, Advil, and Voltaren. That gives it pricing power and a competitive advantage. For example, Unilever’s positive results today were because it was able to past on higher costs of its strong brands to customers.
According to SkyQuest Technology, the consumer health market should reach a value of $486m by 2027, at a CAGR of 6.1% from 2021. This is certainly positive for Haleon.
It has strong margins around 25.9%, considerably better than peers. Reckitt Benckiser’s consumer health business is only 21.8%. But this strong margin may mean it’s unlikely to improve further in the future.
Debt is a concern too. Haleon carries a sizeable proportion of GSK’s debt. The firm starts life with a net debt-to-cash-profits ratio of around four, twice that of GSK.
Should I buy the stock?
For now, I’m holding off buying, but it’s on my watchlist. It’s looking a little expensive on this year’s earnings and I want to see how things play out. I’m not ruling out a buy, but I don’t think it’s primed to soar just yet.
