FTSE-100 pharma and healthcare company GlaxoSmithKline (GSK) is currently engaged in somewhat of a battle with well known activist investor Elliott Advisors. However, that is about the level of change as change is coming and Elliott is only involved as it “believes GSK has a substantial value creation opportunity – 45% upside in its share price – ahead of Consumer Health separation and greater beyond”. We concur that there is an attractive value creation opportunity here.
The company emphasises its “world-leading capabilities in vaccine and pharmaceutical development”, with Pharmaceuticals - including respiratory, HIV, immuno-inflammation and oncology - revenue £17 billion in 2020 and Vaccines - including pneumococcal disease, meningitis, hepatitis, rotavirus, whooping cough and influenza - revenue £7 billion. A Consumer Healthcare business has a portfolio - including brands Sensodyne, parodontax, Polident, Advil, Voltaren, Panadol, Otrivin, Theraflu and Centrum - which generated sales of more than £10 billion in 2020. CEO Emma Walmsley took on the role in 2017 having previously been CEO of GSK Consumer Healthcare and with prior experience from a variety of marketing and management roles at L’Oreal. In 2020 remuneration totalled £7 million, including £1.6 million fixed pay, whilst holding 316,761 shares. We think the shares would rocket if she was fired. Chairman Jonathan Symonds was appointed to the role in 2019, with experience including from HSBC, Novartis, Goldman Sachs, AstraZeneca, KPMG, Diageo and QinetiQ. In 2020 remuneration totalled £0.7 million, whilst holding 35,757 shares.
Results for 2020 showed on revenue of £34.1 billion an adjusted pre-tax profit of £8.1 billion, generating earnings per share of 115.9p and enabling a maintained dividend of 80p per share. Net debt was £20.8 billion, with the earnings per share comparing to a prior year 123.9p. Elliott argues “despite possessing strong businesses in attractive markets, GSK has failed to capture business opportunities due to years of under-management”. Change is coming – including expected further board appointments to increase biopharmaceuticals and scientific experience and with a formal process for Consumer Health company leadership “well underway”. However, that still has to be delivered and is it sufficient? There is argument that the past performance and experience mean Emma Walmsley is not the right leader for the 'new GSK', but the board states that it “strongly believes” she is. There is also clear delivery risk in terms of a successful demerger and with the ‘new’ business performance expected to be underpinned by new vaccines and specialty medicines.
With the noted 2020 performance including 80p per share dividend also expected to be maintained this year and reducing net debt (and expected “net debt / adjusted EBITDA of <2x following separation”), a current 1440p offer price looks relatively undemanding. The anticipated mid-2022 demerger of at least 80% of the Consumer Healthcare business should then see material value creation – the company argues “feedback from a significant proportion of GSK’s shareholders that they wish to own Consumer Healthcare as a new listed entity, given its strong prospects for sustainable sales and profit growth, high cash generation”. That combination could mean the remaining business is currently valued very lightly despite its further potential and a prospective “progressive dividend policy targeting a dividend pay-out ratio equivalent to 40-60%, starting at 45p per share in 2023”. That is currently a more than 3% dividend yield even ignoring the Consumer Healthcare business. Elliott argues “months of diligence and analysis” to reach its conviction and we’ll see on the outcome of that but we certainly see potential to the equivalent of an £18+ per share valuation on a one year view – that a 2.5% dividend yield even ignoring the Consumer Healthcare business. There looks potential for more - including with the businesses becoming easier takeover targets - but even £18 is 25% current upside + dividends. As such, at a 1440p offer price and up to 1500p, a Recovery buy.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website for a new share tip OUT JUST LAST FRIDAY AFTERNOON and a new shorting piece this week click HERE
Filed under: GlaxoSmithKline, Iconic Labs, TomWinnifrith.com, Tate & Lyle, Chariot, N50 website
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