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Haleon - H1 sales and profits up but margins slip

Haleon reported half year revenues of £5.7bn reflecting 10.4% organic growth, driven by improvements in both volume and price.

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Haleon reported half year revenues of £5.7bn reflecting 10.4% organic growth, driven by improvements in both volume and price. The strongest growth was seen in respiratory health with the cold and flu season providing a tailwind early in the period.

Underlying operating profit grew slightly slower than sales, up 8.9% to £1.3bn. This reflected further corporate costs following the demerger from GSK, and inflationary pressures.

Free cash flow fell from £553m to £369m reflecting higher capital expenditure and interest payments. Haleon ended the period with net debt of £9.5bn.

Haleon's now expecting organic revenue of 7-8% for the full year, up from previous guidance of close to 6%.

The Board declared an interim dividend of 1.8p per share.

The shares fell 1.5% following the announcement.

View the latest Haleon share price and how to deal

Our view

Haleon's strong momentum has seen it up revenue guidance two times so far in its first full year as a standalone listed company.

There are a few things that are benefitting the top line of GSK's former consumer healthcare division. Its stable of consumer brands includes a number of household names such as Sensodyne toothpaste, Otrivin nasal spray, Panadol painkillers and Centrum multi-vitamins.

Many of its products have been flying off the shelves because of high levels of cold and flu. How long this can go on for is not within the company's control. As cold and flu only accounts for about a fifth of the organic growth seen in the first half, we're not too concerned.

Those powerful brands also mean Haleon has been able to increase prices without volumes falling. Customers tend to happily stomach a higher price when it comes to medicine they trust.

Volumes could still start to dip if price hikes are taken too far and consumers look for cheaper alternatives. But we're impressed with Haleon's delivery of new and improved products which we view as key to growing market share and maintaining brand loyalty.

Reading between the lines, Haleon is finding it more difficult to improve margins than previously thought. If inflation continues to moderate that will help, but there are no guarantees. Continued investment in innovation and marketing is in our view essential to maintain Haleon's leading brand positions, which may mean there's limited scope to cut costs.

A key focus for investors is how quickly it can pay down its hefty net debt pile. Haleon looks on track to reduce its net debt/underlying cash profit to be below 3x by the end of 2024, an improvement over the earlier target of 4x. That's still worse than many of its peers. A deterioration in trading could derail this plan, and for now debt repayments are likely to keep cash returns to shareholders subdued.

We believe the current valuation already fairly reflects Haleon's strong brand power. With a relatively low yield, only modest growth prospects and a high-teens earnings multiple, it's difficult to currently see what the obvious drivers for a re-rating might be. Further pressure on the valuation is possible if the company's major shareholders Pfizer and GSK to reduce their holdings further.

Haleon key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 2nd August 2023