Description

Haleon PLC is a £24 billion market capitalization, £34 billion enterprise value consumer healthcare products company that was spun-off by GlaxoSmithKline on July 18th of 2022.  GSK’s decade-plus underperformance is well documented and the spin-off of HLN was several years in the making.  The company is listed on the LSE and the NYSE.

Haleon was formed through a meaningful portfolio transformation over the last ten years of GSK's Consumer Products business.  GSK Consumer Products established a JV with Novartis in 2014 and subsequently purchased the entire JV in 2018.  GSK established a JV with Pfizer in 2019 and then divested 50 OTC and skin brands to improve the margin and growth profile of the business.  With the legacy business structured as a joint venture, Pfizer and GSK together retain 45.5% of the shares.  The lock-up expires on November 11th and while both companies have committed to an orderly exit, trading action to date has been poor and continued volatility could provide an attractive entry point for a high-quality franchise that is likely to create value over the very long-term. 

The investment thesis for Haleon is based on the following points:

1.  Haleon is a high-quality franchise and the first true standalone publicly traded global consumer healthcare products company.  Haleon has a leading portfolio of brands including Sensodyne, Centrum, Panadol, Advil, Voltaren, Theraflu & Otrivin.  HLN is a high-quality and recession-resistant business.  The company has strong free cash flow generation – with £1.5B in the near-term, likely growing to more than £2B over the next several years.  Haleon has 60% gross margins and 23% adjusted EBIT margins – well above peer levels.  

    

2. Haleon is an attractive absolute value.  The stock currently trades at 14.6x 2022 estimated EPS and 13.5x estimated 2023 EPS and 11.3x EBITDA with an approximate 7% free cash flow yield.  For perspective, Proctor & Gamble currently trades at 23x estimated 2023 and 17.1x EBITDA.

     

3. If Haleon does not perform well as an independent company, it ultimately has strategic value to acquirers.  In January of 2022, GSK publicly rebuffed an offer from Unilever of 50 billion GBP.  That equates to 67% upside from the current price including the current debt.  If HLN can achieve their strategic goals of 4-6% revenue growth, continued margin expansion and deleveraging of their balance sheet to 3x – the stock will revalue higher. If this does not occur, the company will eventually be acquired, and shareholders will end up receiving dividend payments (target of 30-50% payout) and a healthy premium.

Operations

Haleon is a leading consumer healthcare business with a global footprint in 170 countries.  The company has “number one” category positions in Therapeutical Oral Health, Pain Relief, Vitamins, Minerals & Supplements (VMS), and Respiratory Health.  Management focuses on nine “power brands” which account for 59% of revenues and have “above-company” margins.  These include Panadol, Voltaren, Advil, Otrivin, Theraflu, Sensodyne, Polident, parodontax & Centrum.  

Haleon operates across five categories:  Oral Health, Pain Relief, Digestive Health & Other, VMS & Respiratory Health.  

Oral Health accounts for 29% of company of company sales and HLN has operations in over 120 markets.  Management notes that they specialize in Therapeutic Oral Health, where they are the market leader in providing solutions to consumers for the prevention and treatment of conditions including sensitivity, acid erosion, gum disease, denture care and dry mouth.  Sensodyne is HLN’s largest product in this segment and is the number two toothpaste brand globally with a focus on sensitive teeth.  Polident is the global market leader in denture care and management notes leadership positions in eight of the top ten denture care markets.  The parodontax family is the largest gum health brand and offers specialist gum care products.  Products include mouthwash, toothbrushes, gel, and spray.

VMS accounts for 16% of company sales.  Haleon is the global market leader in this category with leading brands including Centrum, Caltrate and Emergen-C.  Centrum is the world’s leading multivitamin brand focused on supporting immunity, energy, and metabolism.  Emergen-C is the leading Vitamin C supplement which began as a dietary supplement drink and is now offered in gummy and botanical formats.  Caltrate is a supplement for bone and joint supplements and is the second-largest calcium supplement brand and the company’s largest product in China.  

Pain Relief accounts for 23% of sales.  Management notes that leading brands include Panadol, Voltaren, Advil and Excedrin.  Voltaren is the number one OTC Topical Pain relief brand and is sold in 87 countries, primarily as a topical gel but also as a patch, pill, and liquid capsule.  Advil is the number two pain relief brand in North America and the fourth largest OTC brand globally.  Products include tablets, caplets, gel caplets, liquid capsules and drops.  Panadol is sold in over 90 countries and is the number one systemic pain reliever outside the USA and is the sixth largest OTC brand globally.

Respiratory Health has a leading global market position with leading brands inkling Otrivin and Theraflu as well as “local leading” brands including Flonase, Robitussin, and Contac.  Otrivin is the number one topical nasal decongestant brand globally, operating in 40 markets.  Theraflu is sold in 50 markets and consists of products in syrup, hot liquid powder, caplet, and capsule form.  Domestically, Flonase is a leading allergy remedy and Robitussin is a leading U.S. cough remedy. 

Digestive Health accounted for 20% of total company sales.  Haleon is the market leader with leading market share in the U.S. and India.  Tums is the leading OTC heartburn treatment in the U.S. with a range of products to treat both heartburn and digestion.  ENO is the Number one OTC heartburn treatment in India and Brazil with multiple antacid products in the form of powders, liquids, and tablets.  Other Digestive products include Nexium, Gas-X and Benefiber, all effectively focused on the United States.

Geography – From a geographical perspective, 39% of HLN’s revenues will come from North America in 2022, 39% will come from EMEA & LATAM and 23% will come from APAC

Manufacturing – Of note, the company has undertaken multiple efficiency initiatives over the last several years.  The most notable datapoint is that the 41 “legacy” sites that included the operations of Novartis, GSK Consumer Healthcare and Pfizer consumer healthcare businesses have now been reduced to 22.  Additionally, warehousing and distribution centers have been reduced from 200 to 90 while R&D sites have been consolidated from 9 to 4.

Financials

I am modeling sales of £10.7B, £11.5B, and £12B in 2022, 2023 and 2024.  I expect adjusted EBIT of £2.4B, £ 2.63B and £2.82B.  I am modeling diluted EPS of £.18, £ .20, and £.22.  I expect free cash flow of £1.5B, £1.6B, and £1.8B.  Of note, net debt should fall from £10B to £7B and debt to EBITDA should fall from 3.9x to 2x by 2025. 

Management

I believe management is competent.  They are experienced and have deep understanding of the asset base and the markets that Haleon operates in. CEO Brian McNamara has run the business as CEO of the consumer healthcare division since 2016.  Prior to joining GSK, he spent a decade at Novartis in leadership roles in OTC.  McNamara began his career at Proctor and Gamble where he worked for 16 years in product supply, brand marketing and customer leadership.  CFO Tobias Hestler has been the CFO of the Consumer Healthcare divisions since 2017.  Prior to joining the company, he was the CFO at Sandoz.  In 2010, he was named CFO of Novartis’ OTC Division.  Hestler held multiple finance leadership roles at Novartis earlier in his career.  

Risk Factors

Litigation - Zantac litigation is a risk and is largely an unknown

Share overhang - The stock will likely struggle to outperform until Pfizer and GSK exit

Catalyst

Execution by management - achieving consensus numbers, cash flow

Dividend initiation

Debt paydown

Exit of stakes by Pfizer and GSK