Investors have a new healthcare stock to choose from if they wish after Haleon entered the London Stock Exchange today. The £31bn company is the largest listing in more than a decade and could present an interesting option for investors, according to analysts.
“Now we see a new, large, consumer focused business on the UK market, giving investors an alternative to the slim pickings already available in this sector – predominantly Diageo, Unilever, BAT and Reckitt Benckiser.”
Haleon came to life in a favourable environment for consumer healthcare, and Julian Cane, manager of the CT UK Capital and Income Investment trust, said it is set out to “prosper and emerge into the limelight”.
“Haleon as a group has been brought together through a number of purchases and joint ventures and this will be a chance for it to prosper on its own, following its origination having been somewhat obscured by the size of its parent company,” he said.
With the demerger, GSK gave up 80% of its 68% holding in the company with the intention of selling off from November 2022.
In the process, GSK effectively became a biopharmaceutical company focussing exclusively on vaccines and prescription medicines, while Haleon took on the global leadership of consumer healthcare, inheriting a number of well-known brands such as Sensodyne, Voltaren, Panadol and Advil.
Analysts agree that these household brands will give Haleon strong pricing power and present an opportunity for organic and acquisition-led growth.
Hargreaves Lansdown’s senior investment and markets analyst Susannah Streeter said: “Given its successful products, such as Sensodyne toothpaste and Advil and Voltaren pain killers, are household names, its big brand pulling power should help it hang onto customers, who may trade down other products in shopping baskets instead.
“The aim is for a larger proportion of each additional item sold to drop through to profit and price hikes to feed through from last year, which should help.”
Haleon’s initial valuation at £30.9bn came in slightly lower than expected and didn’t break the 2011 record for an IPO, set by mining conglomerate Glencore at £38bn.
But Beckett didn’t see this necessarily as a bad thing. On the contrary, “the fact that it is a little lower than expected means there is scope for investors to build a meaningful position” and make the most of a possible upward trajectory.
However, there are also some concerns among investors, particularly around the amount of debt the company took on as part of the demerger.
GSK passed on “a considerable quantity of its sizeable debt pile” onto Haleon, whose net debt to cash profits (earnings before interest, tax, depreciation and amortisation (EBITDA)) ratio is up to 4 times, compared to the 2 times planned for the new GSK.
In fact, the combined dividend of the new GSK and Haleon will likely be lower than that of the old GSK. The baby giant of consumer healthcare is now expected to concentrate on investment and repaying debt rather than high dividends, which are unlikely to be its short-term priority, said Cane.
Despite the leverage, the prospect of lower dividends and the obstacles inflation will throw in Haleon’s way, Beckett remained positive and considered the stock a good port of call, given “its defensive characteristics and with the current market volatility showing no sign of abating”.
GSK’s performance over 6 months
Source: Google Finance
Since GSK announced its demerger plan in March 2021, the stock went up to peak at 18.7% in April, when it started descending again until last week on July 14, when it started to pick up again, as shown above.