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Haleon - growth in all divisions, full year outlook unchanged

First half revenue rose 13.4% to £5.2bn, led by organic revenue growth of 11.6%.

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First half revenue rose 13.4% to £5.2bn, led by organic revenue growth of 11.6%. There was organic growth across all divisions, with Respiratory Health seeing the fastest growth of 46.7% at constant currency albeit from a relatively low base. Pain Relief and Vitamins, Minerals and Supplements also posted low double-digit growth.

Strong growth in price and volume and cost management allowed for underlying operating margin (at constant currency) to increase 0.9 percentage points to 23% as the group benefitted from a relatively high level of fixed costs allowing revenue growth to drive higher margins. Haleon also managed to offset roughly 40% of cost inflation through forward buying and other measures. Underlying operating profits rose to £1.2bn, 15.5% ahead of last year at constant currency.

The group maintained its full year revenue and underlying operating margin guidance with organic revenue growth in the range of 6 to 8%.

The shares rose 1.3% following the announcement.

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Our View

GSK's former consumer healthcare division has reported a solid set of maiden interim results. A key focus for investors is Haleon's ability to pay down its hefty net debt pile which as of 18 July stood at GBP10.7bn. Haleon is targeting Net debt/underlying cash profit to be below 3x by the end of 2024. For the current year we estimate that Haleon is trending for a level of about 4x. It may be this which has prompted Haleon to guide that its initial dividend is expected to be at the lower end of a 30-50% pay-out range (subject to Haleon Board approval). There is no guarantee that any dividend will be approved.

However the strong cash flow that Haleon is generating gives us some confidence that its targeted debt ratio is achievable. Haleon's stable of consumer brands includes a number of household names such as Sensodyne toothpaste, Otrivin nasal spray, Panadol painkillers and Centrum multi-vitamins. We see these as relatively defensive in the face of a consumer downturn.

We believe the current rating fairly reflects current single digit organic growth rates, with adjusted operating margins coming down a little. With that in mind debt reduction and the associated fall in financing and interest costs will be a key driver of earnings growth in the short to medium term. With a relatively low yield, only modest growth prospects and a mid-teens earnings multiple it is difficult to see what the obvious drivers for a re-rating might be.

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.

Half Year Results

Revenue in North America grew 10% to £1.9bn, supported by price and volume increases. The Respiratory Health division boosted sales by 50% as cold and flu levels rebounded in the region. All other business segments saw sales growth except Digestive Health and Other, where revenue remined flat as strong growth in Chapstick was offset by weakness in Smokers Health. Productivity improvements and cost management helped grow underlying operating margins by 3.5 percentage points to 24.2%. Underlying operating profit rose by 29% to £454m.

Revenue in Europe, Middle East & Africa (EMEA) and Latin America (LatAm) showed a similar picture with growth of 10.6%, again supported by positive price and volume growth. All divisions performed similarly to North America except for Digestive Health and Other, which saw double digit growth in the regions. Regionally, LatAm, Middle East and Africa were the biggest contributors to growth. Europe lagged behind due to a challenging performance in Germany. Underlying operating margin declined by 0.9 percentage points to 22.6% driven by falling sales in Russia and Ukraine. Underlying operating profit rose 6.2% to £467m.

Asia-Pacific had the largest revenue growth of 13% to £1.2bn, supported by price and volume increases. The largest contributors to this were Pain Relief and Respiratory Health, both growing sales in the mid-high twenty percent. Performance in South-East Asia, Taiwan and India was particularly strong, while China's growth was impacted by Covid-19 related lockdowns. Underlying operating margin rose 1.1 percentage points to 24.1%, with underlying operating profit up 18.7% to £300m.

Net cash from operating activities nearly trebled to£680m, which included £224m cash outflows related to separation (from GSK), restructuring, and disposals. Free cash flow rose to £553m from a strong operating performance, up by £364m last year.

Net debt stood at £10.7bn as of 18 July after the group repaid £750m of a £1.5bn term loan. The group maintained its target of net debt to underlying cash profits of 3 times by the end of 2024.

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: 20th September 2022