Pharmaceutical giant GlaxoSmithKline surprised in its annual results but investors say it must do more to convince them it can turn the business around.
GSK reported a 4 per cent increase in sales to £23.9bn in the year to the end of December, while core earnings per share fell 15 per cent. However, the group said it expected 2016 core earnings per share growth to reach double digits and it is on track to save £3bn by the end of 2017.
GSK also reported a 6 per cent rise in group sales to £24bn and forecast that sales of new products would hit its target of £6bn in 2018 rather than 2020 as previously announced.
Smith & Williamson’s Tineke Frikkee, fund manager of the UK Equity Income fund, says although GSK’s results are encouraging, there is still more to be done to reassure investors.
She says: “People were positively surprised with the fact that growth is coming through.
“However, this is more about short-term expectations, especially compared with the poorer performance the firm had recently in terms of earnings growth.”
GSK is the largest holding in Frikkee’s portfolio at 3.4 per cent.
She says: “I am still very happy to hold the stock … because GSK is a very profitable business with a strong balance sheet and dividends are supported.
“The firm has shrunk in the past five years and especially in the pharmaceutical business, which is more volatile compared with the company consumer healthcare division, and its dermatology division.”
In October, fund manager Neil Woodford urged GSK to split up the business to reassure shareholders on the firm’s profitability after earnings dropped over a five-year period.
The investment boutique is pushing GSK to explore a formal separation of the HIV business ViiV, the company consumer healthcare division, and Stiefel, its dermatology division, from the firm’s core medicines and vaccines unit.
Stuart Mitchell, manager of the European Fund at SW Mitchell Capital, who has £20m invested in GSK, says the firm has gone through a lot of pressure recently and there is still the possibility of it splitting up.
He says: “We still have the support of the board that it will not be divided but we don’t know that. There is a lot more the business can do.”
However, he says after the 2014 £9.5bn deal with pharma firm Novartis, which saw the latter acquiring GSK’s cancer business and then selling the majority of its vaccines business in return, GSK looks like “a real business”.
As a next step, Mitchell says GSK might merge with poorly-performing AstraZeneca or it might sell its consumer division.
He says: “There is a lot of value. There are more possibilities to unlock.”
Looking ahead, Frikkee says the pharma business will grow “a bit more strongly” than the others, however she is keeping her expectations modest.
She says: “I’d be prepared to give them more time and see what the cashflow will be. I’d like to see more returns on cashflows and that will come from the pharma side of the firm.”
Although the pharma division of the firm “will become more profitable”, Evenlode fund manager Hugh Yarrow says the consumer division of GSK will perform better.
He says: “The consumer core portfolio is the market leader in pain relief and specialist in oral care. We think it is underappreciated. Margins are currently low, but they can improve.”