GlaxoSmithKline finals

GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

Glaxo announced their final results on 5 February and were in line with expectations that were set by the company's guidance at the time of their third quarter announcement, see here.

Glaxo reported turnover of £26.5 billion, up 1% at constant exchange rates (CER), and core EPS of 112.2p, up 4% at CER.  A final dividend of 23p was declared making 78p for the full year, an increase of 5.4%.

Free cash flow (FCF) improved in 2013 to £4.9bn from £2.2bn last year and net debt decreased by £1.4bn to £12.6bn.  Although gearing is still at a high level at 181%,  debt to EBITDA improved from 1.7 to 1.5 and operating cash flow to debt improved substantially from 26% last year to 52% in 2013.

FCF covered the 2013 full year dividend 1.34x and statutory diluted EPS 1.42x, not as safe as I would like, but much improved from last year.  The improved dividend cover and the stronger financing structure, gives some comfort that mid-single digit dividend growth can be sustained.

Glaxo has a high level of return on capital employed in the business of over 35% compared to a weighted average cost of capital of 5.9%, thereby generating a high level of added value.

Sales of Seretide/Advair now out of patent protection in the USA and Europe, performed well against generic competition with sales up +4% for the year and +9% in the fourth quarter and represented 24.7% of pharmaceutical sales and 19.9% of total sales.

Sales of new pharmaceuticals (those launched in the last 5 years) reached £1.5bn up 33% on last year and represented 6.6% of all pharmaceutical sales.  In the pipeline Glaxo have around 40 new molecular entities (NME) in Phase II/III clinical development and in 2014 and 2015 management expect Phase III read-outs for 6 NMEs and are planning Phase III starts for around 10 new products.

Outlook
In 2014, management expect core EPS growth of 4-8% at CER compared to the 108.4p in 2013 adjusted for divestments completed during that year, on turnover growth of around 2% at CER compared to the £25.6bn for 2013 adjusted for divestments completed in that year.

Glaxo looks to be in better shape with a return to strong free cash flow and a strong new product pipeline.  The shares are currently at 1598p are on an historic P/E of 14.2  with an historic yield of 4.9%.  My assessment of GSK's fair value is around 2040p; this is based on growing last year's FCF of £4.9bn by 4% over the next ten years and then 3% in perpetuity, discounted at a cost of equity of 8.5%.  To warrant today's value the business would need only grow FCF by 2% for the future.