Before the new year, I posted one company under $10 with a long bias. That was Sunopta ($STKL), which is a plant-based company. This article will cover the second company.
This company is called Haleon plc (NYSE: $HLN). And yes it is an overseas company originally listed on the London stock exchange but they have an ADR listing on the NYSE.
I don't always cover overseas companies but this one was a can't miss because I use maybe 7 of their brands and some on a daily basis. Their toothpaste - Sensodyne - is non-negotiable for me and I believe has saved me thousands in dentist visits!
This is still a consumer defensive in this environment and as you will in their numbers below, they have good pricing power & have managed to keep margins steady despite inflation.
Full Disclosure: This is still a high risk investment. But, I have already taken a position of 100 shares at $7.83. And I will build into it.
Haleon is the spin-off baby of GlaxoSmithKline (GSK) and Pfizer. They're not strictly a pharmaceutical company but rather an over-the-counter consumer health company.
This is quite interesting because JNJ has done the same thing and they've just filed their IPO prospectus earlier this week. The new company is being called Kenvue Inc. (weird name!) I can't wait to dig into that. Maybe we have an opportunity there. I digress.
These are the brands for Haleon and most people in Europe and around the world will know these. I hear 9 of them are popular in the US as well.
The oral health and vitamin brands are number one in their category. Most of their products are over-the-counter and therefore, don't need a push to sell. They are items that are everyday use for health care. They hold #1 positions in multiple markets throughout their categories.
Growth Prospects
The Market for these products is still massive at about $170B per year and with a more focused growth strategy the company can now grow these brands further and increase brand penetration. They have an outlook of 4-6% growth per year which doesn't seem like a lot but, it's still decent for mature brands like this.
The company came public in an odd turn of events. Unilever (the company similar to Proctor&Gamble) in the UK, had made a bid for the subsidiary and was rejected by GSK. Months later the company was spun-off at almost 40% discount to IPO price and the share prices have fallen further since then.
The company has a large amount of debt, which we will see in the financial review below but, nevertheless, they have maintained their growth trajectory.
The good numbers for the company are - Revenue Growth, Margin and Free Cash Flow.
Revenue Growth
As you can see below, they grown 16% YoY as reported in the third quarter to reach GBP 2.9billion in quarterly revenue. Almost of the growth was from organic sales - through price increases and the rest was actually FX helping them because of a weaker British Pound.
Despite these FX numbers, an organic growth of 8.1% is impressive and the organic growth during half-year until June was 11.6%. This company has pricing power as well because of the brands they sell. I like these growth numbers.
9 months ended Sep 2022 total revenue was GBP 8.08B (YoY growth of +14%)
Margins and Free Cash Flow
Gross Margins for the company average at around 60%.
Operating Margins have been maintained at about 25% through pricing increases
They are free cash flow positive at GBP 553m as of HY 2022 and covert almost all their profits to cash.
Net profits were GBP 909m for 9 months 2022 with a margin of 11%
Debt! The company was spun off with quite a lot of debt on the books and therefore, they now have pressure to grow.
Their total debt is GBP 11B with GBP 1B cash on the balance sheet. Most of the debt is long term.
With an EBITDA of GBP 2.7B that's a leverage ratio of over 4x, which is not a happy number for a listed company.
The company has guided to a 8% growth for FY 2022
They have also guided to 4-6% growth in the medium term as I mentioned.
They've committed bring down debt to 3x leverage by 2024 (they are actively paying off debt)
They have committed to pay dividends of up to 30% - 50% of their net profit (but we don't know when)
With a rising a rising rate environment, repaying the interest may become burdensome and eat into the net profit margins.
They may not be able to pay dividends anytime soon or may have to stop payments
They have strong brands but, the categories are still quite generic and one of their largest market - the US - still doesn't have immense brand penetration. It's easy to switch among most of these products to other brands.
The British Pound may eventually become much stronger creating currency headwinds like we've seen for a lot of companies in the US.
Valuation, even at this low level of share price is not in the single digits. The valuation on a EV/EBITDA basis and Forward P/E basis is about 17x. (This is the same valuation for P&G and Colgate-Palmolive). I'd have liked it to be around 10x.
Why did the shares fall after being listed?
Few reasons:
There's litigation ongoing with regard to the product Zantac. This is a stomach drug and there are claims that ingredients in them cause cancer. The parent company - GSK - produces Zantac and many thought Haleon was also part of the issue. However, they have declined to indemnify any liabilities to both GSK and Pfizer. Also, many of the cases have already been dismissed. So much of it was about perception.
The shares had a lock-up period in November and they were sold by Pfizer after that.
GSK said they would sell their 6% stake in a disciplined manner so they are still selling their holdings.
As with the previous company, this would be a buy and hold for me. I think the company eventually grows. I would accumulate below $9. We're currently at $7.55. I'd take profit as I go along. This could eventually be a good dividend paying company as well. So, allocating a small portion of capital for the longer term may not be the worst idea.
Again, this is a high-risk investment so I wouldn't allocate a huge amount of capital but, I don't have a feeling that this company goes bankrupt. I think the major risk for a company like this probably being bought out again!
This is not investment advice. I have no position in this company but, I may add to my existing position 3 trading days after the publication of this article.