(BofA-ML) GlaxoSmithKline: Up to Neutral – value emerging but still some headwinds
* Upgrade to Neutral on valuation and EPS momentum
We upgrade GSK to Neutral from Underperform and maintain our 1450p price objective.
Key to our upgrade are: 1) Valuation: The stock is now trading c18% off its April highs
and c8% below our unchanged 1450p price objective (assumes 5.5% yield and 17x 17E
PE) offering c14% total return with the c6% dividend yield, albeit less than the 23-25%
we see for our Buys in the sector; 2) Excepting further Fx volatility, underlying EPS
momentum may be bottoming. Consensus EPS estimates for 2015/2016 are now
broadly in line with ours, having fallen c20% this year and having more than halved since
early 2012; 3) 17-20E EPS growth back in line with the sector at 9% as GSK exits the
earnings trough and Consumer/Vaccines synergies, ViiV (HIV), and Nucala (mepolizumab)
launch drive a return to growth; 4) Pipeline activity increasing to end-2016 with three
PIII and one PII readout of interest expected and a Nov 3rd 2015 R&D day expected.
* GSK growth 17-20E back in line with sector
Rolling forward our sector valuation comps to 17E PE and 17-20E EPS CAGR reveals
GSK as having EPS growth in line with the sector over our valuation period. Importantly
we model US generic Advair launching in 2017 depressing 17E EPS growth to 2% but
thereafter we forecast 17-20E sales CAGR 5.2%, EBIT 8.6% and EPS 9.3% driven by: 1)
Consumer/Vaccines merger synergies and new products (Shingrix/Bexsero) driving
respective EBIT growth of 18% and 11% respectively; 2) ViiV (HIV) EBIT growth 8% due
to Tivicay/Triumeq growth (peak sales now $7bn or £4.7bn); 3) Nucala (mepolizumab,
antiIL5, severe asthma) launch in late 2015/early 2016 (2020 sales £1.3bn).
* But still cash concerns over balance sheet/cash/dividend
However, despite these potential positives we remain concerned about GSK’s balance
sheet which remains stretched, offering little strategic flexibility and presents risk to the
dividend beyond 2017. Including pension provisions and GSK’s Consumer and ViiV JV
partners’ options to put their shares to GSK, GSK’s 16E net debt to EBITDA ratio is 3.5x.
We forecast slow balance sheet recovery given GSK’s promised 80p dividend 15-17E
exceeds forecast FCPS of 53p in 2015 and 63p in 2016.