Is there a near 15% upside in Haleon’s share price?

Haleon posted better-than-expected interim results as demand remained strong despite the cost of living crisis. Yet profit margins were down, leading Haleon’s share price to drop post-earnings. The consumer healthcare company’s progress in reducing its debt pile could determine where the share price goes next.

• Revenue up 10.6%, and adjusted profits up 8.9% in the first half of 2023.
• Profit margins drop 40 bps to 22.1%.
•  Credit Suisse sees a near 15% upside in Haleon’s share price.

Haleon’s [HLN.L] share price has fluctuated this month. While shares in the consumer healthcare company are up nearly 8% over the past month, the stock dropped sharply in the first week of August following the publication of first-half results, which showed a narrowing in profit margins.

Under CEO Brian McNamara, Haleon has undertaken a strategy of simplifying its portfolio and reducing costs, including laying off staff. But will this strategy pay off in the second half of the year as Haleon looks to reduce its debt pile?

Haleon ups guidance for second time this year

Haleon’s revenue and profit rose in the first six months to June despite fears the cost of living crisis would see customers opt for cheaper brands. Revenue grew 10.6% to £5.74bn in the period, with sales from ‘power brands’ like Panadol and Sensodyne toothpaste up 10.1% as customers stayed loyal. Adjusted operating profits grew 8.9% to £1.27bn.

Respiratory products performed strongly in the period, with revenue up 22%. Haleon attributed this to a strong cold and flu season and sales growth of Contac in China.

Yet profit margins fell 40bps to 22.2%, with the blame being placed on higher standalone costs and inflationary pressures. The squeeze on margins led to a 4.5% drop in Haleon’s share price on 2 August, although the stock has now regained those losses.

Haleon said it now expects organic revenue growth of between 7% and 7.8% in 2023. Adjusted operating profits are pegged to grow between 9% to 11% for the full year.

Haleon looks to pay down debt

Paying down its debt is a priority for Haleon. The company is saddled with a debt pile of £9.53bn at the last count — representing 3.4x net debt/adjusted EBITDA over the last 12 months. Haleon has said that it aims to get net debt/adjusted EBITDA below 3x during 2024.

Going towards paying off the debt pile is a £250m payment from Karo Healthcare AB for the rights to athlete’s foot treatment Lamisil.

Anti-smoking aid Nicotinell is also up for sale. In July, Bloomberg reported that the product was attracting interest from consumer companies and investment firms in what could be a £800m sale. However, according to a Sky News report this month, bidders are looking to pay substantially less for the brand, with private equity firm Inflexion the latest to join the list of potential suitors.

Haleon share price forecasts

Having been spun off from GSK [GSK.L] in July last year, Haleon had a rocky start to its life on the FTSE 100, with the stock slumping in its first couple of months post-listing. However, since the demerger, Haleon’s share price is now up 6.6% and 3.07% year-to-date, closing Friday 11 August at 337.4p.

Any drop in profit margins is an area of concern. Haleon has to invest heavily in research and marketing in order to maintain a leading brand position. That could reduce the amount of cost-cutting available to shore up margins or cash to pay off debt.

But Haleon upping guidance is a positive sign for a company that is striking out on its own. Its ability to hike prices while not harming volumes is also notable, although there is a risk that pushing prices too far will eventually put off customers, who will turn to cheaper own-brand products.

Do Haleon shares have more upside? Last week Credit Suisse trimmed its forecast on Haleon’s share price from 390p to 387p — a 14.7% upside on Friday’s close. Credit Suisse maintained its ‘outperform’ rating on the stock. Among the analysts, Haleon’s share price has a 360p 12-month median target. Hitting this would see a 6.7% upside on Friday’s close.