Haleon reported strong first quarter trading in its AGM update. Organic revenue growth of 9.9% was driven largely by price increases, but volumes also ticked up.
Respiratory health was the best performing product category helped by a continued strong cold and flu season. There was growth in all other categories bar vitamin and mineral supplements which faced strong comparatives due to the Omicron wave in early 2022.
Full-year organic revenue growth is now expected to be towards the upper end of the previously announced 4-6% guidance range.
The shares were up 2.7% following the announcement.
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Our view
GSK's former consumer healthcare division, Haleon, has seen last year's strong performance continue into 2023.
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 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.
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 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 (32.0%) 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.
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