Broker tips: Haleon, Warpaint, Deliveroo
By Iain Gilbert
Date: Thursday 18 Apr 2024
(Sharecast News) - HSBC initiated coverage of Haleon on Thursday with a 'buy' rating and 370.0p price target as it took a look at consumer health stocks, saying the company stands out for its portfolio strength, the quality of its execution and better potential for exploiting new growth avenues.
"We view Haleon as possessing an advantaged portfolio with strong positions across its main product segments and geographies," HSBC said. "More important than this, we regard the company as demonstrating superior execution and having excellent potential for growth both within and beyond its current categories. All of this should underpin consistent mid-single digit-organic sales growth alongside steady progress on underlying margins."
HSBC said there were a number of elements to its confidence. For a start, it thinks the group's oral care business can continue to deliver mid-to-high-single-digit organic sales growth on a consistent basis.
The other feature that distinguishes Haleon from its peers was that it looks to be taking some of the most interesting strides in new therapeutic areas, such as its erectile dysfunction product licencing from Futura medical, HSBC said.
"We think that Haleon can deliver robust margin expansion over the medium term thanks to its new productivity programme and better leverage as volume growth rebuilds," said HSBC. "We recognise that Pfizer's 22.6% stake in Haleon means that there are likely to be further placings in the coming months and years, given previous comments on reducing its stake, but the relatively modest reaction to the most recent 10% placing suggests that this should not be a major constraint to the share price. Having been spun out with a relatively high level of gearing, strong cash generation in the last 18 months has seen this drop to under 3.0x ND/EBITDA."
HSBC said that on its current forecasts, Haleon trades on a 2024 estimated price-to-earnings of 18.3x and is broadly in line with European Consumer Staples on a 12-month rolling PE basis.
Berenberg initiated coverage of Warpaint on Thursday with a 'buy' rating and 550.0p price target as it said the company's highly cash-generative business model and debt-free balance sheet support strong top-line growth.
Warpaint owns the W7 and Technic cosmetics brands. Berenberg noted that its products are among the most affordable in their categories and are distributed across major retail outlets with significant store estates.
"Historically, the business has experienced some challenging periods of end-market performance, linked to the struggling UK high street," it said. "However, it now has a more diversified and strengthened approach, delivering capital appreciation and persistent end-market outperformance. We expect this to continue given an array of structural and company-specific opportunities ahead."
The German bank highlighted a significant margin recovery, noting the gross margin has expanded by 800 basis points since FY 2020, which it perceives as sustainable.
"Historical margin expansion has been driven by growth in end-market volume, coupled with management's strategic decision to refine its non-branded sales focus and acquire its US sales and marketing platform," noted Berenberg. "We forecast end-market growth to be volume-driven and supportive of further margin expansion. We project gross margin expansion of 120bp from FY 2024E to FY 2028E."
Food delivery platform Deliveroo impressed the market with forecast-beating first-quarter numbers on Thursday, but they weren't enough for Shore Capital to change its 'sell' rating on the stock.
The broker acknowledged that the new financial year had started slightly better than expected, with gross transaction values in both the UK-Ireland and international divisions up 6% year-on-year.
Nevertheless, while take-rates appear to be stabilising from the preceding quarter, Shore Capital pointed out that order numbers were flat in the UK and Ireland, compared with growth in the same period for rival Just Eat, which shows that Deliveroo has continued to lose market share.
"Order growth rates in key regions for ROO appear to be converging with peers and market share losses in the UK&I region vs. Just Eat despite a meaningfully higher take-rate implied cost of growth (price promo driven we suspect) could be slightly disappointing for investors", the broker said.
Shore Capital said it sees "better value elsewhere", with Deliveroo trading at higher valuation multiples to others in the sector despite weaker growth.
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