Haleon: Initiating Coverage on Consumer Health Giant With Leading Brands; Shares Fairly Valued

We are initiating coverage on Haleon HLN with a fair value estimate of $8.70 per share. Haleon is one of the largest consumer health companies in the world with a portfolio of market-leading brands including Advil, Sensodyne, and Tums. Our forecast model relies on a 5-year top-line compound annual growth rate of 4.5% and a moderate year-over-year margin expansion.

As a leader in the consumer healthcare industry, Haleon is well-positioned to enjoy long-term macro trends including aging population, premiumization of consumer health, and increasing awareness of self-care. We think many of Haleon’s products have garnered strong brand equity and the company’s large salesforce base can successfully launch these brands into new regions, as we have recently seen with a launch of parodontax toothpaste in South Africa and Centrum multivitamins in India.

On margin, we expect a modest year-over-year step-up from portfolio rationalization and supply chain improvements. We think portfolio expansion through launch of high-innovation products (basic Sensodyne vs. Sensodyne Pronamel multi-action) can be margin accretive given they can utilize the same manufacturing footprint as the original product but can be sold at higher prices thanks to their additional benefits. We believe management will also focus on lowering material costs from product design and formulation efficiencie, which should act as additional tailwinds for margins.

We award Haleon a wide moat because we believe the company’s strong brand reputation, robust pricing power (intangible assets), and, to a lesser extent, economies of scale (cost advantage) should continue to support economic profits for at least the next 20 years. In consumer health, and especially over-the-counter markets, real product differentiation is low but perceived product differentiation is high. This allows products with strong brand power to win over competition and we believe Haleon is a leader in the majority of its product categories.