Haleon plc bullish on newest blue chip in consumer healthcare market (NYSE: HLN)

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Haleon plc (NYSE: HLN) is a leader in consumer health products with a well-known brand portfolio that includes “Advil”, “Theraflu”, “Robitussin”, “Excedrin”, “Centrum”, “TUMS” and “Sensodyne”, among others. The shares began trading as an independent company in July following the completion of its spin-off from GSK plc (GSK) while Pfizer Inc (DFP) is also a minority shareholder.

The title as a pure play in this segment that captures global exposure to rising trends in demand for oral health and over-the-counter medicines with a multi-channel distribution strategy. Haleon is profitable and expects recurring free cash flow to translate into a steady dividend payout by next year and annual increases going forward. HLN has been selling for the past few weeks and we are bullish here with the feeling that the stock is undervalued and well positioned to climb higher.

HLN Metrics

source: IR company

GSK-Haleon spin-off

Haleon has evolved over the past decade, originally as a unit within Novartis AG (NVS) before being acquired by Glaxo Smith Klein in 2018. Another milestone was reached in 2019 when GSK has formed a joint venture with Pfizer to combine their consumer healthcare segments. . Over the years, the group has exited some categories related to skincare and other non-essential products. GSK chose spin-off Haleon to better focus on its vaccines business.

With the transaction, GSK shareholders received one share of the new company for each share held. Following the deal, GSK shareholders directly controlled approximately 54.5% of the new Haleon while the corporate entity retained a 13.5% stake. Separately, Pfizer now owns approximately 32% of HLN, although they are expected to exit the position according to a statement on page 75 of the registration deposit.

HLN Key Metrics

The UK-headquartered company uses the British pound as its functional currency. Prior to the spin-off, the company reported revenue of £9.5bn for 2021, down 3.5% year-on-year. That said, context considers that 2020 was an explosion of over-the-counter medications at the height of the pandemic, resulting in a 17% increase in sales to consumers seeking fever medication and cold remedies. By this measure, 2021 revenue was still up 13% from the 2019 pre-pandemic baseline.

HLN Metrics

source: IR company

The most impressive trend was firming profitability, with 2021 after-tax profit up 22% versus 2020. The result was driven by higher margins based on pricing initiatives and the sales mix, as well as lower general and administrative expenses as a percentage of revenue. . First quarter data was also strong, with Haleon posting revenue of £2.6bn, up 14%, while after-tax profit jumped 43%, propelled by a higher gross margin. high.

Preliminary Q2 data released in late July was highlighted by organic revenue growth of 12.9%, while noting that e-commerce sales now account for 9% of total activity with “teenage growth”. For the full year, management is targeting organic revenue growth of between 6% and 8%.

For reference, the oral health products category, which includes specialty toothpastes and mouthwashes, accounted for 29% of activity in 2021, followed by pain relievers at 23% and digestive health at 20%. By region, the operation is global, with North America contributing approximately 36% of sales, while EMEA and Latin America together account for 40%.

HLN Metrics

source: IR company

The company has around £9.4 billion or $11.1 billion in long-term debt. Given £2.4bn of adjusted EBITDA for FY2021, the leverage ratio is currently around 4x. Although this level is high, the strong cash flow generation keeps the liquidity position stable.

At Haleon tips, management wants the net debt to EBITDA leverage ratio to trend below 3x by the end of 2024. In the medium term, the forecast calls for organic annual sales growth of 4% to 6% “ahead of the market “driven by the dynamics of oral health and the increasing penetration of high-growth emerging markets. We mentioned the future dividend. While no amount has been confirmed, statements suggest an upfront payout in 2023 based on second-half 2022 financial results at the lower end of a 30% to 50% payout ratio.

HLN Metrics

source: IR company

Is HLN undervalued?

There’s a lot to love about Haleon with its flagship products taking the top spots in terms of market share globally. High-level themes of an aging global population driving demand for these types of personal healthcare categories as well as an emerging middle class in developing countries buying more consumer packaged goods highlight the bullish scenario. long term for the title.

We’ve already mentioned several of the “power brands” like Advil and the list goes on with everyday items consumers rely on like “ChapStick” and even “Nicorette gum” as an FDA-approved drug to help people to quit smoking. It’s fair to say that Haleon immediately steps into the top tier of blue-chip consumer staples companies thanks to its portfolio.

HLN products

source: IR company

What we like about Haleon is that it’s relatively unique as a large-cap pure-play on mainstream “retail” healthcare, while most of its major peers have a broader profile. in pharmaceuticals or basic household products. We can place Johnson & Johnson (JNJ), Procter & Gamble Co (PG), Colgate Palmolive Co (CL), Kimberly Clark Corp (KMB), Sanofi (SNY) with Bayer AG (OTCPK:BAYZF) in this group. Each of these companies offers competing products in specific categories, but also have key differences given the various operating strategies and exposure to the category.

What we are seeing is that based on some core valuation metrics, HLN looks undervalued next to the “consumer core” leaders. HLN, with a market capitalization of approximately $29.2 billion and revenue of $13.0 billion in the past year, trades at a price-to-sell multiple of 2.2x. This is well below stocks like JNJ and PG which are closer to 5x but similar to KMB and SNY at 2x. Coming closer to a P/E ratio for the stock at around 18x based on past year earnings, HLN also sits at a discount to consumer staples like JNJ and KMB closer to 25x but with a premium over more “pharma” stocks like Bayer and Sanofi on average 12x. We believe that HLN has room to converge upwards.

Data by Y-Charts

A key point here is that HLN shares are down about 20% from its original price. One explanation we offer is that some shareholders receiving the shares in their brokerage account may have simply sold the position, either to realize some liquidity quickly or due to confusion as to what Haleon is. The setup here creates an opportunity to recover stock that is simply shot. Of course, we will need general market sentiment and equity momentum to cooperate, but HLN may outperform on the upside in the face of improving macro conditions going forward.

Final Thoughts

We are bullish on HLN and expect it to bounce back to its initial price of around $7.30, which is at least a 20% upside from the current level. We believe that as more investors become aware of the company’s profile and product portfolio spanning market-leading brands, stocks have the opportunity to achieve a higher valuation multiple.

We can look forward to HLN’s second quarter earnings report which is expected to be released on September 19th. This will be the first report as an independent, publicly traded company and will provide management with the opportunity to provide an update on current market conditions and forecasts. Operating margin and growth trends by region will be key monitoring points.

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