Originally part of two massive organizations, Haleon plc (NYSE:HLN) recently organized a demerger transaction that I don't think many investors understood. In my view, Haleon's product diversification and know-how of developing personal care products is worth more than what the market is currently indicating. Successful data analysis of the creation of marketing strategies and new agreements with IT companies could imply a valuation of close to $10.4 per share. I obviously see risks from the current amount of debt and new regulations in the personal care sector, however even considering those the company remains cheap.
Established in Weybridge, England, Haleon Plc is positioned as the world's largest company dedicated to the manufacture and marketing of personal care products, leading the international market with some of its best-known brands such as Sensodyne, Centrum, and Panadol among others.
In my view, Haleon's power and positioning in the international market can be a bit better understood if we take into account its relationship with Pfizer (PFE) and GSK plc (GSK). PFE and GSK reported meaningful positions in Haleon after a demerger that took place in 2022. In my view, the fact that Haleon was originally part of large organizations will be appreciated by most investors.
With that said about the past of Haleon, I believe that the future looks sweet. In a recent presentation, management delivered medium term guidance that includes adjusted operating margin expansion, a maximum of 6% sales growth, and growing operating margin expansion. If the company delivers these figures, and also manages to lower the net debt/EBITDA to less than 3x before 2024, I believe that many more investors will have a look at the company's future expectations.
Before designing my financial models, I took a look at the expectations of the financial analysts, which, in my opinion, was quite beneficial. I thought that investors will do good by having a look at them too.
Market estimates include 2024 net sales of GBP12 billion, net sales growth of 4.37%, an EBITDA of GBP3.1 billion, and EBITDA margin close to 25.87%. 2024 EBIT would stand at GBP2.81 billion with an operating margin close to 23.40%. 2024 EBT would be GBP2.53 billion with a net income of GBP1.901 billion. Finally, 2024 FCF would stand at GBP1.918 million with a 2024 FCF margin of 15.94%.
As of September 30, 2022, Haleon Plc reported cash worth GBP1.09 billion together with short term borrowings of GBP684 million, in addition to long term borrowings of GBP11.353 billion. Besides, derivative financial assets stand at GBP321 million together with a derivative financial liabilities of GBP160 million. A net debt of GBP10.784 million was reported.
I did appreciate that management expects to deliver lower net debt/EBITDA in the near future. With that, in my view, certain investors may buy less shares because of the total amount of financial debt.
The last balance sheet that I could consult was of June 2022. It included a massive amount of intangible assets. Hence, I believe that impairment of intangible assets could be a risk for the organization. With that, in my view, with an asset/liability ratio of close to 2x, the company's financial position appears pretty much under control.
Some of the strengths of Haleon's strategy are the diversification of its products and managing to capitalize on new business opportunities mainly supported by the new digital advantages. In line with these thoughts, let's note that Haleon recently signed an agreement with Microsoft (MSFT), which will allow consumers to easily access information about 1500 Haleon products. Under this case, I assumed that more agreements with large IT companies could accelerate sales growth.
Together, the companies are expanding functionality in the Microsoft Seeing AI app to provide more detailed labeling information for consumers for over 1500 Haleon products across the UK and US. Seeing AI is a free mobile app, for the visually impaired community, designed to narrate the world around them. Source: Haleon and Microsoft use AI to enhance health product accessibility for blind and partially sighted people
In a market of personal care products that is estimated to be over $125 billion annually, there are several revenue drivers, which could accelerate Haleon's business model in the coming years. First, there is the expansion of the middle class globally, allowing an expansion of access to their products. Besides, the expansion of the elderly population, which are large customers of this type of product, is changing the demands on the health systems, and increasing self-registration and awareness of the need to protect their health.
In my view, Haleon's future business plan will likely be enhanced by the ability to locate customers and develop products tailored to their needs. For this, Haleon has to deepen its marketing strategies as well as develop technical knowledge about data analysis of the creation of commercial strategies.
Under my base case scenario, I assumed 2033 net sales of GBP22.181 billion with net sales growth of 8%, 2033 EBITDA of GBP5.799 billion, and an EBITDA margin of 26.15%. I also assumed 2033 FCF of GBP3.6 billion with a FCF margin close to 16.52%.
With a discount of 7.68%, the NPV of future FCF would stand at GBP18.185 billion. Besides, with an EV/EBITDA multiple of 13.55x, the terminal value will likely be around GBP78.583 million with a net present value of GBP32.33 billion.The results would include an enterprise value of GBP50.523 billion with an equity of GBP39.739 billion. Besides, I obtained an IRR of 3% with an implied fair price of GBP8.60 or $10.4 per share.
Under this scenario, I assumed that changes in consumer trends regarding health, nutritional, and food products may be a complication for Haleon's business growth. Added to this point and beyond the perception of consumers about the company, which is also one of the risk factors that Haleon considers in its annual report, there is the possibility of drastic or sudden changes in government regulations on production in addition to the requirements in the ingredients and compositions of the products, which can actively affect the operations of the company.
In general terms, Haleon currently faces the challenge of repositioning its brands and products as well as sustaining its operations successfully without the support of other major leaders in the sector in a very competitive market that is exposed to changing volatility in line with the needs of its clients. The company will have to know how to adapt to the needs in this sense as well as intelligently use its tools to carry out the innovation of localized products and a correct reading of the international market in terms of consumer preferences.
I also need to mention that the financial debt could generate some problems. If management can't successfully lower its net debt/EBITDA ratio, Haleon may receive less demand for its stock, which may lead to higher cost of equity and higher WACC. As a result, I believe that financial analysts may lower the company's price targets, which could push the stock price down.
Under my previous assumptions, I also included 2033 net sales of GBP18.6 billion with a net sales growth of 5%, 2033 EBITDA of GBP4.880 million, and an EBITDA margin of 26.15%. I also anticipated 2033 free cash flow of GBP3.080 billion with a FCF margin of 16.50%.
If we include WACC of 10%, the net present value of future free cash flow would stand at GBP14.912 billion. Besides, with an EV/EBITDA multiple of 13.55x, the terminal value would be GBP66.127 billion with NPV of GBP21.07 billion. In sum, I obtained an enterprise value of GBP35.9 billion with an equity of GBP25.19 billion, an IRR of -2%, and a fair price of $6.65 per share.
Haleon was originally part of two large organizations, which means that Haleon has most likely a lot of beneficial connections in business and the capital markets. It is also worth considering that the recent guidance given included operating margin growth, sales growth, and significant reduction in the net debt/EBITDA ratio. In my view, successful data analysis of the creation of commercial strategies and beneficial agreements with IT companies could serve as revenue catalysts. Even considering the risks from lack of debt reduction, I believe that Haleon remains undervalued at its current market price.
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Disclosure: I/we have a beneficial long position in the shares of HLN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.