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Haleon - full year guidance in-tact despite wobble in volumes

Haleon's third quarter revenue grew by 5.0% on an organic basis to £2.8bn.

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Haleon's third quarter revenue grew by 5.0% on an organic basis to £2.8bn. Growth was driven by 6.6% higher prices. That more than offset the 1.6% negative impact of volume and product mix, which was largely down to the normalisation of the Emergen_C vitamin supplement to pre-pandemic levels in North America, and one-off run downs of inventory by certain retailers.

North America saw a decline of 1.5%, but this was more than offset by growth in other territories. Power brands, which include Sensodyne and Panadol, outperformed the wider portfolio with growth of 9.3%.

Ignoring the effect of exchange rates, underlying operating profit increased by 8.8% to £689m driven by the strong pricing discipline and cost efficiencies.

Full year expectations remain unchanged. Organic revenue growth is expected to land in the 7-8% range and underlying operating profit growth guidance remains between 9-11%.

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Our view

Haleon's strong momentum has seen it up revenue guidance twice so far in its first full year as a standalone listed company. And as we approach the final furlong for 2023, the improved expectations seem very much in reach.

There are a few things that are benefiting 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. That's starting to normalise now. But as cold and flu only accounted 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, or the economic outlook deteriorates further. 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 decide 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 November 2023