Things are set to get tougher for UK drugs giant GlaxoSmithKline plc (LON:GSK) next year according to UBS, although the Swiss bank reckons concerns over earnings declines and dividends are now “overdone”.
Swiss bank UBS has upgraded GlaxoSmithKline plc (LON:GSK) to ‘buy’, claiming that concerns over earnings declines and dividend sustainability are “overdone”.
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That said, analyst Michael Leuchten expects “things will likely get tougher” for GSK on an earnings front in the near future, with 2018 showing a fall and no growth to be registered in 2019.
After that though, Leuchten said the drug make “should then emerge from its earnings plateau”.
He concedes that uncertainty surrounding the trajectory of GSK’s ViiV Healthcare HIV business justifies a discount, but adds that the valuation now reflects that.
“The division has been the main growth engine but that will change as competitor Gilead re-enters the HIV integrase inhibitor market in 2018 taking new patient share from GSK's Tivicay/Triumeq franchise,” writes Leuchten.
“Given GSK's EBIT dependency on ViiV, this uncertainty requires a discount to the sector in 2019 on realistic earnings base. At 13x we believe that is now priced in - a good starting point when looking at GSK as a bond proxy.”
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The dividend also “looks secure” according to the analyst, who is forecasting two years of 80p per share before GSK might look to increase it.
“SUBStantial negative consensus earnings revisions have reinvigorated the debate as to whether GSK will cut its dividend.
“We disagree. We think GSK can increase cash flow generation, likely via higher CAPEX discipline and therefore consider the dividend secure.”