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GlaxoSmithKline - A mixed bag despite sales and profit growth

Nicholas Hyett, Equity Analyst | 28 July 2021 | A A A
GlaxoSmithKline - A mixed bag despite sales and profit growth

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,546.00 | Buy: 1,546.20 | Change 12.00 (0.78%)
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GlaxoSmithKline (GSK) reported second quarter sales of £8.1bn, up 15% at constant exchange rates (CER). That reflects particularly strong growth in Pharmaceuticals and Vaccines businesses.

Underlying operating profits rose 43% to £2.2bn as the group benefited from a weaker comparator, due to de-stocking in both pharmaceuticals and consumer healthcare in the same period last year, and ongoing cost savings.

The group announced a dividend of 19p per share for the quarter and continues to expect full year dividends to hit 80p.

GSK shares rose 2.7% following the announcement.

Our view

GSK has been stuck in limbo for much of the last three years - and while there are signs of some progress in these results the fundamental challenges haven't gone away.

Having initially announced plans to separate its consumer and pharmaceuticals businesses back in 2018, GSK has finally provided the details. Although separation still won't happen until mid-2022.

The separation will be achieved by a demerger of the Consumer business, rather than an IPO or trade sale. Existing GSK investors will simply be handed shares in the newly listed Consumer company, although GSK will retain a stake which it intends to sell off to help bolster its balance sheet.

On the subject of the balance sheet, the group plans to parcel off a considerable quantity of its sizeable debt pile into the new consumer business. The consumer business will start life with a net debt to cash profits (EBITDA) ratio of up to 4.0, compared to the 2.0 times planned for New GSK. That makes sense - the consumer business is capital light and revenues should be relatively stable over the long term, unlike pharmaceuticals, allowing it to service a larger debt pile. Nonetheless the balance sheet set up means the Consumer business will probably start life with a pressing need to cut debt.

It's this need to clear up the balance sheet that's led to a 31% cut in the forecast dividend in 2022. And with the New GSK dividend expected to tick along at a lower level from 2023, and the Consumer business likely to be cutting debt at least initially, it could take years for the overall dividend to return to its current level. As with any dividend there are no guarantees.

There is, however, slightly better news on guidance for New GSK over the next five years. Operating profit growth is expected to average more than 10% a year, driven by growth in Vaccines and Speciality Medicines - while more mature treatments are expected to be broadly stable over the period.

That would be a major step up from the flat or declining profits of recent years. The group's been helped by the moderation of Seretide/Advair sales declines, and is looking to capitalise on recently approved HIV treatments, a growing pipeline of oncology drugs and a strong vaccines business (albeit one which has only just joined the fight against coronavirus).

Overall we find it difficult to get excited about GSK. Free cash at the combined business is well off covering the dividend and as a result debt continues to march higher. A dividend cut and asset sales after separation might go some way to solving the core problem. But the ambitious growth targets for the future are predicated on successful trial results. And drugs fall at the final hurdle all too often.

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GSK key facts

  • Price/Earnings ratio: 13.4
  • 10 year average Price/Earnings ratio: 13.8
  • Prospective dividend yield (next 12 months): 4.8%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half Year Results (CER)

Second quarter Pharmaceuticals sales rose 12% to £4.2bn. That reflects good growth across the 'New & Speciality' portfolio. New oncology and Immuno-inflammation treatments grew 69% and 46% respectively, although they still account for only a small proportion of overall sales. Immuno-inflammation sales included the first sales of COVID-19 treatment sotrovimab.

By comparison HIV sales showed more modest 14% growth year-on-year but generated sales of £1.2bn. Established drugs accounted for £1.9bn of sales - unchanged year-on-year. Regionally, growth was concentrated in the US where sales rose 23%.

The Vaccines business reported second quarter sales of £1.6bn, up 49% year-on-year. That was led by Meningitis, where sales rose 46% to £225m, while Shingles vaccine sales rose 1% to £295m. Established vaccines reported growth of 28% to £758m. The division also reported sales of £260m relating to its vaccine adjuvant, which improves immune responses, for pandemic vaccines.

Underlying Consumer Healthcare sales rose 7% to £2.3bn - driven by good growth in both oral health (Sensodyne) and pain relief (Advil and Panadol). Vitamins, minerals and supplements saw sales fall 6% as the group lapped challenging comparatives last year.

The group reported a modest decline in operating costs, both Selling, General & Administrative and Research & Development. That partly reflects the impact of lockdowns, as well as continued restructuring efforts and favourable legal costs.

Free cash flow hit £313m for the first 6 months of the year, down from £2.4bn a year ago. That reflects currency headwinds, various timing effects and the non-recurrence of disposals made last year. Net debt at the end of the quarter stood at £21.9bn compared to £23.4bn a year ago. The increase largely reflects the payment of dividends, which once again exceeded free cash flow.

The group now expects to deliver results towards the upper end of its previous guidance (for a decline of mid-to-high single digit percentage EPS growth excluding any COVID-solution sales.)

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.