We are raising our rating on Haleon plc (HLN) to BUY from HOLD. Haleon provides consumer health products under well-known brands including Advil, Theraflu, and Centrum. Management is leveraging its top brands to increase household penetration, and pursuing new growth opportunities across channels and geographic regions, highlights Taylor Conrad, an analyst with Argus Research.

The company’s medium-term financial goals include 4%-6% sales growth, operating margin improvement, and debt reduction. The company is also seeking to take advantage of emerging secular trends, such as the growing popularity of preventive medicine, and the increasing shift from prescription to over-the-counter medications.

Logo, company name  Description automatically generatedWe expect Haleon, supported by its market-leading brand names, to benefit from these tailwinds. Management has also signaled confidence by beginning dividend payments. The company’s shares are listed on the NYSE in the form of American Depositary Shares (ADSs), each of which represents two ordinary shares.

From a technical perspective, the shares have been in a bullish pattern of higher highs and higher lows since September 2022. On the fundamentals, they are trading at a valuation discount to peers. We believe that a higher valuation is warranted and are setting a target price of $10, or 19 times our FY24 EPS estimate.

Haleon began trading as an independent company on July 18, 2022 following its spinoff from British biopharma company GlaxoSmithKline (GSK), which is now focusing on specialty medicines and vaccines. All results for prior periods have been carved out from former parent GSK’s accounting records.

Haleon recently posted 2022 revenue of GBP 10.9 billion, up 13% on a reported basis and 9% organically, reflecting a 5% volume increase and a 4% contribution from higher pricing. The adjusted gross margin narrowed by 50 basis points to 62.4%, and the adjusted operating margin narrowed by 60 basis points in constant currency. In U.S. dollars, at an average exchange rate of $1.24/GPB, full-year revenue totaled $13.8 billion.

Adjusted full-year earnings were 18.4 pence per ordinary share ($0.47 per ADS). Along with the fourth-quarter results, management provided guidance for 2023. It expects 4%-6% organic sales growth and a flat adjusted operating margin. In the medium term, it looks for 4%-6% organic revenue growth, modest operating margin expansion, and a net debt/adjusted EBITDA ratio of less than 3 by the end of 2024.

Recommended Action: Buy HLN.

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