GlaxoSmithKline PLC (GSK)

The Brentford, UK-based GlaxoSmithKline PLC (LSE: GSK), established in 1999, is engaged in the research, development, production and commercialisation of pharmaceuticals, vaccines, and consumer healthcare products under the brand names including Abreva, Physiogel, Panadol and Polydent. It has a wide product portfolio comprising Daraprim, Bexsero, Adartrel and Quinvaxem. The company's total outstanding market capitalisation stood at £74.81 bn and dividend yield stood at 5.14% (as on March-25-2019).

Recently on March 8^th, 2019, the Company granted conditional share awards to Executive Directors and Persons Discharging Managerial Responsibilities (PDMRs) under the GlaxoSmithKline 2017 Performance Share Plan.
Established in November 2009, ViiV Healthcare was created by GlaxoSmithKline and Pfizer as a global HIV company. It announced positive 48-week report from two essential phase III studies demonstrating injectable two-drug long-acting regimen of cabotegravir and rilpivirine. In addition, recently the Serious Fraud Office (SFO) closed its investigation, into GSK and its subsidiaries, which began in 2014 due to alleged bribery to doctors in China.
For the financial year 2018, GSK delivered a decent operating performance with new product launches (particularly Shingrix), cash generation and sales growth. As per the figures posted, the Group’s sales grew AER 2% and CER 5% to GBP 30.8 billion. The net cash flow from operations stood at GBP 8.4 billion with a free cash flow of GBP 5.7 billion. The company also paid out 23p dividend for the last quarter and 80p for FY2018. The total operating margin of 17.8% was recorded with a total EPS of 73.7p.

As for the segment-wise performance, the pharmaceuticals sales amounted to GBP 17.3 billion, flat AER but +2% CER; the vaccines sales reached GBP 5.9 billion, +14% AER and +16% CER while lastly, the consumer healthcare sales generated GBP 7.7 billion, -1% AER and +2% CER. Besides, the sales from the new respiratory product grew extensively to GBP 2.6 billion, +35% AER and +38% CER and Shingrix sales also generated GBP 784 million, +>100% AER and +>100% CER.

Share Price Performance

Daily Chart as at Mar-14-19, before the market close (Source: Thomson Reuters)

On 14th March 2019, at the time of writing (before market close, GMT  11:10 AM), GSK shares were trading at GBX 1,505.0, down by 0.093 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,648.80/GBX 1,296.80. At the time of writing, the share was trading 8.72 per cent lower than its 52w High and 16.0.5 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 7,324,341.60; 30 days - 7,044,169.67 and 90 days - 8,289,991.47. The average traded volume for 5 days was up by 3.98 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.00, reflecting in line with the benchmark index. The outstanding market capitalisation was around £74.81 billion.
 
Valuation Methodology

Note: All forecasted figures and Peers selection have been taken from the Thomson Reuters.

Conclusion
GlaxoSmith is a giant pharmaceutical and consumer healthcare company with strong fundamentals and growth prospects. Based on strong fundamental performance and the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 1,506.40 (as on 13th March 2019) with single-digit upside potential based on 10.50x NTM EV/EBITDA on FY19E EBITDA.

 

AstraZeneca PLC (AZN)

AstraZeneca PLC (LSE: AZN), headquartered in Cambridge, the United Kingdom, is a biopharmaceutical company engaged in the development and commercialization of prescription medicines with operations in more than 100 countries. It’s primary focus areas for treatment of diseases include oncology, respiratory, inflammation & autoimmunity, neuroscience, cardiovascular, renal & metabolism, infection & vaccines. The company's total outstanding market capitalisation stood at £79.75 bn and dividend yield stood at 3.39% (as on March-25-2019).

On March 12th, 2019, AstraZeneca Plc announced to have granted ordinary shares of GBP 62.87 per share to certain PDMRs (Pascal Soriot and Marc Dunoyer) as per the terms of the Astra Zeneca Deferred Bonus Plan (AZDBP) and the AstraZeneca Performance Share Plan.

In the same month, the company announced that European Medicines Agency formed the Committee for Medicinal Products for Human Use and adopted a favourable opinion of Lynparza (olaparib) tablets and has recommended their use for treatment of adult patients with germline BRCA1/2-mutations.

AstraZeneca released its annual report for the year 2018 (FY2018) delivering reinvigorated sales growth. The total revenue was recorded at $ 22.1 billion, down AER 2% and down CER 2% on the prior year due to investments in the launch of new products. This includes product sales of $ 21,049 million, up 4% AER; 4% at CER) and externalisation revenue of $ 1.041 billion (down 55% at AER; 55% at CER). The reported operating profit stood at ~$ 3.4 billion, down 8% at AER and 7% at CER along with the core operating profit of $ 5.7 billion, also down 17% at AER and CER.

As for the returns to shareholders, the reported earnings per share (EPS) of $ 1.70 depicted a decline of 28% at AER (29% at CER) as compared to FY2017 and the Core EPS also reduced by 19% to $ 3.46. However, going forward, the guidance for 2019 prescribes an increase in Core EPS at CER to $ 3.50-3.70 as the company plans to attain a high single-digit percentage increase in Product Sales to underpin improved profitability. At the backdrop of this, the Board has planned a progressive dividend policy with a second interim dividend of $1.90 per share for FY2018, taking the full-year dividend to $ 2.80.

Share Price Performance

Daily Chart as at Mar-14-19, before the market close (Source: Thomson Reuters)

On 14th March 2019, at the time of writing (before market close, GMT 11:17 AM), AZN shares were trading at GBX 6,279, down by 0.22 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 6,432.48/GBX 4,746.00. At the time of writing, the share was trading 2.38 per cent lower than its 52w High and 32.30 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,525,075.80; 30 days - 1,891,536.20 and 90 days - 2,050,007.28. The average traded volume for 5 days was down by 19.37 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.00, reflecting in line with the benchmark index. The outstanding market capitalisation was around £79.75 billion. 
 
Valuation Methodology

Note: All forecasted figures and Peers selection have been taken from the Thomson Reuters.
 
Conclusion
Recent organisational changes coupled with the company’s focus on emerging markets makes the company an attractive stock to watch. The company is focusing on cost-cutting, which will improve the margins, and an excellent flow of revenue is expected from the drugs in the pipeline. Based on healthy fundamentals and the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 6,293 (as on 13th March 2019) with single-digit upside potential based on 8.5x NTM Price/Book Value on FY19E Book value per share.

 

Diageo PLC (DGE)

Diageo PLC (LSE: DGE) is a London-based global alcoholic beverage company that offers a broad collection of over 200 brands across spirits and beer in more than 180 countries across the world. These brands include Captain Morgan, Johnnie Walker, Baileys, Don Julio, Cîroc and Ketel One vodkas, J&B, Smirnoff, Crown Royal, Buchanan's and Windsor whiskies, Tanqueray and Guinness amongst others. The company's total outstanding market capitalisation stood at £73.40 bn and dividend yield stood at 2.16% (as on March-25-2019).

As per the company’s interim results for the half-year ended December 31^st, 2018, the company reported net sales of GBP 6.9 billion, an improvement of 5.8% with organic growth partially offset by unfavourable exchange. Moreover, the operating profit was recorded at GBP 2.4 billion, depicting an increase of 11.0% primarily driven by organic growth achieved in all the regions and categories. As a result, the broad-based organic net sales growth was up 7.5% along with a 3.5% rise in the organic volume. 

In addition, the organic operating profit grew by 12.3%, ahead of top-line growth, as the cost inflation and higher marketing investments were more than balanced by the company’s enhanced price mix and efficiencies derived from the productivity programme. The operating activities amounted to net cash inflows of GBP 1.6 billion, up by GBP 356 million and the free cash flow stood at GBP 1.3 billion, also up GBP 317 billion on the prior year, reflecting a continued strong cash position.
Diageo also paid out an interim dividend of 26.1 pence per share, up 5%. The basic EPS was down 1.6% to 80.9 pence and the pre-exceptional EPS was up by 13.6% to 77.0 pence, driven by improvements in the operating profit plus low finance charges.

Share Price Performance

Daily Chart as at Mar-14-19, before the market close. (Source: Thomson Reuters)

On 114th March 2019, at the time of writing (before market close, GMT  12:34 PM), Diageo shares were trading at GBX 3,057.0, up by 0.164 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 3,081.76/GBX 2,345.50. At the time of writing, the share was trading 0.80 per cent lower than its 52w High and 30.33 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 4,182,800.20; 30 days - 3,864,295.27 and 90 days - 4,131,212.60. The average traded volume for 5 days was up by 8.24 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.81, reflecting low volatility as compared to the benchmark index. The outstanding market capitalisation was around £73.40 billion.

Valuation Methodology

Note: All forecasted figures and Peers selection have been taken from the Thomson Reuters.

Conclusion
The financial strength of the Diageo Plc reflected in the dividend, which has increased 5 per cent during the first half of FY19. Growth continuation from organic net sales and improvement in all the regions will positively impact the top-line and bottom-line of the company. Based on strong fundamental performance and the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 3,052.00 (as on 13th March 2019) with single-digit upside potential based on 25.90x NTM Price/Earnings on FY19E earnings per share.

*The buy recommendation is also valid for the current price as covered in the report (as on 14th March 2019). 

Note- GBp or GBX are interchangeably used for Pence Sterling.

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