Glaxo’s groggy on Liberum sell By Geoff Foster
DRUGS giant GlaxoSmithKline was under the weather as investors voted with their feet ahead of the first-quarter results and Capital Markets Day on May 6, a day before new chairman Philip Hampton takes over. The heavyweight shares were sold down to 1537p before closing 26.5p off at 1548.5p after Liberum Capital advised clients to sell down to 1400p.
Analyst Naresh Chouhan is of the opinion GSK’s multi-billion-pound series of asset swaps with Novartis does not ‘transform’ the business. The perception that GSK is a wildly different business to the one that went before is flawed and a re-rating of the shares seems unwarranted.
GSK is forming a consumer health jointventure with Novartis while buying the Swiss group’s vaccines business and divesting its cancer drugs portfolio to Novartis. After completion of the deal, GSK plans to return £4bn to shareholders.
Despite growth in GSK’s consumer sales and vaccines operations, pharma will still account for 70pc of earnings in 2018 compared with 72pc in 2014.
Chouhan says GSK’s drug pipeline is far from sufficient to transform GSK into an AstraZeneca re-rating story. GSK’s P3 pipeline, which has just five assets, only contributes 5pc of 2020 group sales compared with 30pc at Astra. The general perception that GSK’s dividend is manageable at this level is also questionable.
The board will continue to pay the dividend out of debt for the next three years but just a small downgrade to 2018 forecasts would result in a fourth year where the dividend is partly paid using debt. A stretched dividend payment schedule would make it difficult for the management to invest fully in the business for the next three years.
Break-up talk has been doing the rounds for weeks but Liberum believes it is already fully factored into the present valuation. Rival broker JPMorgan remains underweight ahead of May 6 and has a price target of 1380p.
Astra rose 8 to 4863p. Buyers dosed up with shares after hearing this week that it’s recently approved ovarian cancer drug, olaparib, can also help men with prostate cancer. Astra’s cancer drug pipeline formed a central plank of its defence against a £79bn – or £55 a share – takeover attempt by Viagra-maker Pfizer last year.
Grocery shares were put through the mincer after depressing details of a truly astonishing £6.38bn loss from Tesco. The mega kitchen- sink job by new boss Dave Lewis left it 12.1p or 5pc lower at 222.65p, while Wm Morrison fell 8.1p to 190.4p and J Sainsbury 10.2p to 263p. They exerted downward pressure on the Footsie which dropped below 7000 for a short time before rallying to close down 34.69 points at 7028.24. The FTSE 250 shed 77 points to 17,635.55. As expected, the Bank of England left UK interest rates on hold again at 0.5pc and the asset purchase target steady at £375bn.
Wall Street rose 88.68 points to 18,038.27 after Coca-Cola’s forecast-busting revenue and earnings countered disappointing figures from fast-food chain McDonald’s. Earnings per share in the first- quarter slipped from $1.21 to $1.01.
BT buzzed 3.7p higher to 460.55p after Nomura lifted its target price to 550p from 520p. It’s a new dawn for the group after its £12.5bn acquisition of mobile network, EE. Warren East is stepping down from the board at the end of May as he takes up his new post at Rolls-Royce.
The LSE came on offer at 2545p, down 7p. Boss Xavier Rolet, in an interview with the Wall Street Journal, suggested the exchange may strike a deal with one of the big four western bourses within two years.
Marketing communications group Creston rose 5p to 123.5p after in-line results and the acquisition of a 51pc stake at How Splendid, a London-based digital-design consultancy. The group expects revenues to increase by 2.7pc to £76.9m and cash of £8.3m. Analysts believe the deal is a potential game-changer, giving its exposure to more attractive business areas.
Pub and bar owner Punch Taverns frothed 1.62p higher to 105p after saying it expects to meet its full-year forecasts. It has turned fullyear losses of £174.9m into pre-tax profits of £348.5m and reduced its net debt by £53m since the launch of a capital restructuring in October.
Strongly supported of late, science technology group Allied Minds declined 9.5p to 678p after its subsidiary SciFluor raised £19.9m in the marketplace. Proceeds will be used to accelerate the development of its two lead compounds to treat retinal diseases and epilepsy, as well as expanding its drug discovery and marketing pipeline. William Koster is its new chairman. AIM-listed Mariana Resources rose 12pc to 3.02p on hearing its joint venture partner Lidya has commenced the 10,000m phase II drill programme at the Hot Maden project, in Turkey. Broker Northland Capital said the project has been eagerly anticipated after the success of phase I that defined high grade gold-copper mineralisation and zinc-lead mineralisation. Results are expected to start flowing next month.