Glaxo unlocking hidden value

Growth coupled with currency tailwind proves a heady mix
Thursday 01 Dec 2016 Author: William Cain


Large and complex conglomerates are often packed with hidden value which can ultimately be unlocked to the benefit of investors.

National champion pharmaceuticals outfit GlaxoSmithKline (GSK) is perhaps the most obvious example on the London market. The great news for investors is the business is already well underway to creating what is potentially a mind-blowing amount of value.

GSK - Comparison Line Chart (Rebased to first)

On top of that, a currency tailwind helped Glaxo’s sales gain 23% versus in the third quarter while earnings surged 40% - a trend which could continue for the next nine months.

Unlocking value

Glaxo has produced clear targets around its Consumer Healthcare division in particular which, if accomplished, would produce stunning results.

Chief executive Andrew Witty, soon to be replaced with Glaxo’s Consumer Healthcare chief Emma Walmsley, said in a strategy set out in May 2015 that the division could deliver operating margins of 20% by 2020. That compares with margins of 11.3% last year.

Analyst forecasts indicate the unit will be delivering sales of £9.3bn in 2020. This would result in an estimated operating profit, if targets are hit on time, of £1.9bn. To put that in perspective, Glaxo’s Consumer Health division, currently its smallest division, would be earning almost the same as FTSE 100 heavyweight Reckitt Benkiser (RB.).

Today, Reckitt is worth £47bn compared to Glaxo’s current market value of £75bn. Based on similar valuation multiples to Reckitt, Glaxo’s Consumer division would be worth around £39bn, of which it owns 63.5% with joint venture partner Novartis.

Pharma and Vaccines potential

Opportunity in GlaxoSmithKline’s Consumer Healthcare division is just the beginning of the pharma giant’s value appeal. It still has two other divisions – Pharmaceuticals and Vacinnes – which both deliver more profit today than its Consumer Healthcare unit.

Pharmaceuticals delivered £14.2bn of revenue and £4.3bn of operating profit in 2015 and is expected to grow its top line close to 5% annually out to 2020.

Vacinnes generated sales of £3.7bn and operating profit of £1.0bn and may grow even faster, according to estimates by Alastair Campbell at Berenberg, at 10% a year.

Across its three divisions, Glaxo boasts high quality assets and a management team which is now focused squarely on unlocking their value for shareholders.

Risks include a relatively uncertain outlook in Glaxo’s important respiratory portfolio, where successful new drug launches will be needed to offset declining sales in its Advair asthma treatment.

Any failure to meet 2020 targets would result in an adverse market reaction which would probably see shareholders lose money. (WC)


Glaxosmithkline (GSK) £15.30

Stop loss: None

Market value: £74.6bn

Prospective PE Dec 2017: 13.2

Prospective dividend yield: 5.3%

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