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How GSK has responded to the Brexit fallout

Sales and earnings are looking good but it's really the big upswing in free cash flows which has us excited
July 27, 2016

It would be an understatement to say that currency movements have had an impact on the interim results of pharmaceutical group GlaxoSmithKline (GSK). But looking at the core figures and scientific advances that have been made in the period, and there’s certainly a degree of cautious optimism.

IC TIP: Hold at 1669p

Although currency movements and adjustments made for the Novartis asset swap sweetened the increase in turnover, an underlying increase of 5 per cent is certainly not to be scoffed at. Core earnings per share in the first half were up 12 per cent at constant currencies to 24.5p: this has prompted management to suggest that full-year EPS will be at the upper end of guidance.

Shareholders will be pleased to see cash flow back on the rise again, with net inflows from operations in the second quarter reaching £1.2bn. Even accounting for the £340m currency boost, this is a huge improvement on the approximately £200m in net cash inflows achieved in the same period last year.

New products in the pharmaceuticals and vaccines divisions contributed £1.05bn in the second quarter, up from £446m in the same period the prior year. The product pipeline is also looking good and management expects to complete regulatory filings for four new drugs within six months. This product innovation has gone a long way to making up for the loss of revenue from some key drugs, particularly respiratory product Advair, which saw revenue fall 16 per cent.

As the current weakness in sterling looks likely to persist, management entered into a revaluation of GSK's liabilities from its consumer healthcare and HIV joint ventures. The resultant £1.8bn one-off payment pushed reported earnings into negative territory, while the increase in liabilities has also translated across to the balance sheet. Separately, the net asset value was affected by the deduction of Treasury shares from retained earnings.

Before these results broker JPMorgan Cazenove was expecting full-year core pre-tax profits of £6.76bn, giving core diluted EPS of 96.6p (2015: £5.09bn/75.7p).

GLAXOSMITHKLINE (GSK)

ORD PRICE:1,669pMARKET VALUE:£81.3bn
TOUCH:1669-1669.5p12-MONTH HIGH:1,679pLOW: 1,210p
DIVIDEND YIELD:4.8%PE RATIO:na
NET ASSET VALUE:11.8p*NET DEBT:353%

Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201511.510.117119.0
201612.80.24-3.219.0
% change+11-98-102-

Ex-div: 11 Aug

Payment: 13 Oct

*Includes intangible assets of £24bn, or 493p a share