GlaxoSmithKline PLC

GlaxoSmithKline Plc (GSK) is a healthcare company, which focuses on the manufacturing, commercialisation, and development of pharmaceuticals vaccines and consumer healthcare products. It offers drugs for the treatment of cancer, HIV, anti-viral, metabolic, anti-bacterial, rare diseases, cardiovascular and urogenital, immuno-inflammation, respiratory, central nervous system (CNS), and dermatology. The company offers over the counter (OTC) products for pain, relief, nutrition, skin health, oral health, and gastrointestinal disorders.

Recent News
On 1^st August 2019,the company released that the EC (European Commission) had approved marketing permission for 2 new approaches of administering Nucala; pre-filled safety and a pre-filled pen syringe.
On 1^st August 2019, the company announced that it had accomplished its deal with Pfizer to combine their customer healthcare businesses into a JV (Joint Venture). In the JV, GlaxoSmithKline had a controlling equity interest of 68 per cent and Pfizer had an equity interest of 32 per cent.

Financial Highlights (Q2 and H1 FY2019, £million)


For the second quarter of the financial year 2019, the company’s total revenue stood at £7,809 million and increased by 7 per cent (AER), while turnover increased by 6 per cent (AER) to £15,470 million in H1 FY19.The company’s pharmaceuticals sales increased by 2 per cent (AER) to £4.3 billion, while on a CER basis, sales decreased by 1 per cent.  In Vaccines, sales surged by 26 per cent (AER) to £1.6 billion, while on a CER basis, sales increased by 23 per cent. In the Consumer Healthcare segment, sales stood at £1.9 billion. Total Group’s operating margin stood at 19 per cent.  Adjusted Group’s operating margin reduced by 1 per cent (AER) to 27.8 per cent.

Total EPS increased to 19.5 penceas compared with the corresponding period of the last year. In H1 FY19, total EPS increased by 80 per cent (AER) to 36.3 pence against the previous year same period data. Adjusted EPS climbed to 30.5 pence against the previous year of same period data, due to the strong operating performance, and settlement of open tax matters.

In the second quarter of the financial year 2019, free cash flow was £0.4 billion and net cash flow from operations was £1.4 billion. The board declared the quarterly dividend per share of 19 penceand continue to expect 80 pence for the fiscal year 2019.

Share Price Performance

Daily Chart as at August-19-19, before the market closed (Source: Thomson Reuters)

On 19th August 2019, at the time of writing (before the market close, GMT 9:30 AM), GlaxoSmithKline PLC shares were trading at GBX 1,665.10 and an increased by 0.43% against the previous day’s closing price. Stock's 52 weeks High and Low are GBX 1,749.40/GBX 1,408.80. The company’s stock beta was 0.97, reflecting almost the same movement of the stock as compared to the benchmark index.

Valuation Methodology

*Peers: Vectura Group PLC, Hikma Pharmaceuticals PCL, BTG PLC, and AstraZeneca PLC.

Conclusion
In the financial year 2019, the company expect a decline in adjusted EPS in the range of 3-5 per cent at CER.The company will close the Consumer Healthcare nutrition disposal business by the end of this year and anticipated the impact of the Tesaro acquisition. In FY2019, the company continue to expect a dividend per share of 80 pence.

The company had raised its earnings, with strength in its consumer health and vaccines business offsetting weakness in its pharmaceutical’s unit caused by the launch of a generic rival to its asthma treatment Advair. The company said that the strong uptake in the United States for Shingrix, a shingles vaccine, as well as rapid sales of meningitis vaccines had contributed to the growth. The company is currently working on its plans to split off its consumer health business into a joint venture with Pfizer.

The company had shown decent fundamentals and growth prospects.The company’s business segments had performed well during the second quarter of FY2019.

Based on the profitability prospects and valuation done using the above methodology, we have given a "Hold" recommendation, at the closing price of GBX 1,658 (as on 16th August 2019), based on the 3.48x NTM EV/Sales (approx.) on the FY19E sales (approx.).

Rio Tinto PLC

Rio Tinto Plc (RIO) is an international mining and metal company that mainly focuses on exploring, mining and processing the Earth's mineral resources. The company's operations are differentiated in four segments, namely Energy & Mineral, Copper & Diamonds, Aluminium and Iron Ore.

On 16^th October 2019, the company will announce the Quarterly operations review.

Financial Highlights (H1 FY2019, US$ million)

(Source: Interim Reports, Company Website)

As higher iron ore prices helped in offsetting the effect of lower aluminium prices and lower volumes, excluding the $0.8 billion contribution by the coking coal assets divested in 2018, consolidated sales revenue of $20.7 billion was 9% higher than 2018 first half. Lower volumes and higher iron ore costs were more than offset by a surge in iron ore prices, which drove underlying EBITDA by 19% to $10.3 billion against the $9.2 billion in 2018 first half. The EBITDA margin stood at 47%. In H1 FY2019, lower sales volumes (iron ore) reduced underlying EBITDA by $232 million.

The company recorded a profit in 2019 first half of $2.9 billion and net profit attributable to the owners totalled to $4.1 billion in 2019 first half, mainly reflecting the impairment of Oyu Tolgoi. Driven by the robust contribution from Iron Ore, underlying earnings during the current period was $4.9 billion, which was 12% higher than the corresponding period of the last year. The underlying earnings per share climbed by 19% to 301.5 cents.

The group declared ordinary dividend per share of 151 cents, which amounted to $2.5 billion, and announced a special dividend of 61 cents, which amounted to $1 billion. Net gearing increased to 10% at 30 June 2019.

Share Price Performance

Daily Chart as at August-19-19, before the market closed (Source: Thomson Reuters)

On 19th August 2019, at the time of writing (before the market close, GMT 9:30 AM), Rio Tinto PLC shares were trading at GBX 4,035 and an increased by 0.75% against the previous day closing price. Stock's 52 weeks High and Low are GBX 4,979.14/GBX 3,278.77. The company’s stock beta was 1.45, reflecting the higher movement of the stock as compared to the benchmark index.

Valuation Methodology

*Peers: Anglo American PLC, Kaz Minerals PLC, Glencore PLC, and South32 Ltd.

Conclusion
In spite of weather impact, the company expects the run-rate to be around $0.5 billion from its mine-to-market programme in FY 2019, while capital expenditure is expected to be approximately $6.0 billion in 2019 and around $6.5 billion in the next two years. With an aim to strike a balance between cash returns to shareholders and sustainable investment in the business, the company expects the cash returns to shareholders to be in a range of 40-60% of underlying earnings over the long run, indicating the confidence of the board in the performance of the company.

The prices of various commodities can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. In the short-term, the company expects to face challenges from macroeconomic and geopolitical uncertainties, not least from the continuing global trade tensions, which has impacted global growth.

The successful operation of the group has enabled it to deliver sector-leading cash returns to shareholders, which is backed by its strong portfolio and balance sheet. The company is no longer under the threat of monetary policy normalisation and a successful resolution to US-China trade negotiations would provide a significant boost to the company.

Based on the healthy financials and supported by valuation done using the above method, we have given a "BUY" recommendation at the closing price of GBX 4,005 (as on 16 August 2019) with lower double-digit upside potential based on 8.20x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*Currency exchange rate taken for 1 USD = 0.824675 GBP.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 19-August-19).

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