Results from Haleon PLC (LSE:HLN, NYSE:HLN) and its rejection of GSK and Pfizer's request for indemnification impressed analysts at UBS, who have said this should allow the focus to return to the spun-off consumer healthcare group's "compelling prospects".
Barclays analysts, however, noted that GSK has contested Haleon's stance, saying “we do not agree with Haleon’s position given we believe there are grounds for us to bring indemnification claims regarding certain potential liabilities (including against Haleon)” in a statement emailed out by investor relations.
Since providing an official statement on the Zantac litigation on August 11, 2022, in which the company stated that it was not a party to any Zantac claims, Haleon has now also notified former parent GSK and joint venture (JV) partner Pfizer that "it rejects their requests for indemnification".
This rejection owes to the fact that indemnities set out in the JV agreement only cover "their consumer healthcare businesses as conducted when the JV was formed in 2018" and, during that time, Zantac OTC was not marketed by either GSK or Pfizer in North America.
UBS noted that Haleon has stated that, at this stage, it is removed from the Zantac litigation as several hurdles would have to be cleared first, namely 1) causal association between Zantac Rx and the development of cancer; 2) causal association between Zantac OTC and the development of cancer; 3) potential liability being spread among the suppliers of ranitidine therapy products in North America and 4) GSK and Pfizer's indemnification request.
Reiterating its 'buy' recommendation and 380p price target versus Haleon's 265.45p last closing price, the Swiss bank's analysts said they had increased their forecast for underlying operating profit margins, partly due to 90% of material costs being hedged for the second half of the year, limited exposure to energy, favourable FX impact and "limited to no signs of changes in consumer behaviour".
On these updated forecasts, Haleon's shares trade on 14 times 2023 earnings, which the UBS analysts said is a 30% discount to the EU food & Home and Personal Care sector.
They concluded that the discount is: "Unwarranted in our view given Haleon's superior resilience, scarcity value and compelling medium term prospects."
Barclays analysts, on the other hand, retain a 'neutral' stance on Haleon, but suggested they they would be open to changing this in the not-too-distant future.
The analysts said the firm's trading commentary was "positive" and the rebuttal on Zantac was "strong".
"We still prefer to wait on the sidelines until Zantac visibility improves, but underlying trading looks encouraging, deleveraging is on track, and the balance sheet looks strong enough to pay any likely settlement while remaining investment grade.
"We also don’t see a placing coming November 10th given the Zantac situation, but the discount valuation is likely to persist," the Barclays analysts said.
They noted that Haleon's valuation "seems undemanding" to them.
"For investors able to take a 2-3y view, we think Haleon looks attractive at current levels. However, nearer term we continue to see potential headwinds from overhang and (misplaced, in our view) investor concern around Haleon's balance sheet," the Barclays analysts concluded.