Haleon regains momentum after inflationary spike

After a disappointing performance by rival Reckitt Benckiser (RKT), revenue and profit growth at Haleon (HLN) looks all the more impressive to investors. Shares in the consumer health giant climbed 8 per cent on the morning of its annual results, despite some lingering concerns about its debt burden.

As always, the group’s so-called “power brands” were its sales standouts – with six out of nine delivering double-digit growth. Emerging markets, which account for one-third of turnover, saw revenue expand by almost 15 per cent in 2023. There was less momentum in developed economies, where sales ticked up by just under 5 per cent.

Reported gross profit was up by a modest 2.6 per cent to £6.7bn and gross margin fell by 90 basis points to 59.7 per cent due to cost inflation. However, these headwinds began to ease towards the end of the year, resulting in gross margin growth in Q4. 

The group’s net debt to adjusted Ebitda figure currently sits at three times – which Stifel analysts note “may be offputting for investors”. However, management sought to defuse these complaints in the results. “Within 18 months of our demerger, we reduced net debt by over £2bn, bringing net debt to adjusted Ebitda down from [circa] four times to three times, reflecting both strong cash conversion and financial discipline,” said chief executive Brian McNamara. 

Haleon has consequently increased its proposed dividend payout from 30 per cent to 35 per cent of adjusted earnings, and plans to allocate £500mn to share buybacks this year. Both GSK (GSK) and Pfizer (US:PFE) will sell off their remaining stakes in the business in the near future, which could constrain share price performance. 

But with the stock trading in line with peers at just under 17 times forward earnings for 2025, we’d argue that some short-term volatility is worth enduring. Buy. 

Last IC view: Hold, 325p, 3 August 2023