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Haleon - margins held, with 9% organic sales growth

Haleon reported inaugural full year revenues of £10.9bn reflecting 9% organic growth...

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Haleon reported inaugural full year revenues of £10.9bn reflecting 9% organic growth, driven by improvements in both volume and price.

Underlying operating profit was up 5.9% to £2.5bn, ignoring the effects of exchange rate movements. Margins were flat at 22.8%, as pricing and efficiencies offset inflationary pressures.

Net debt was £9.9bn, down from the £10.7bn at the point of separation from GSK. Free cash flow grew from £1.2bn to £1.6bn, despite £0.4bn worth of demerger costs.

Haleon's 2023 guidance points to organic revenue growth between 4 and 6%.

The Board is declaring a maiden final dividend of 2.4p per share.

The shares were down 2.6% in early trading.

View the latest Haleon share price and how to deal

Our view

GSK's former consumer healthcare division, Haleon, posted a solid set of maiden results with organic revenue growth beating previously upgraded guidance.

There are a few things that are benefitting the top line. 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. Many of its products had been flying off the shelves because of high levels of colds, flu and COVID-19. There's no guarantee that will repeat in 2023.

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.

Ultimately, we can't knock progress. But we wonder how much longer this trend can continue. As consumers continue to grapple with difficult conditions, volumes could start to dip if price hikes are taken too far. There's increased risk of customers swapping to cheaper generic alternatives.

Reading between the lines, Haleon is finding it more difficult to improve margins than previously thought, which is perhaps no surprise given the inflationary environment. Continued investment in 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 Haleon's ability to pay down its hefty net debt pile of close to £10bn. Haleon is targeting 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 it 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 mid-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 (32%) and GSK (12.9%) start to reduce their holdings.

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 March 2023