Market news and results from Marriott and Haleon

Market News

Gold ($1,948 an ounce) and other safe haven assets rose after the US was stripped of its top-tier sovereign credit rating by Fitch, echoing a move made more than a decade ago by S&P. The credit assessor downgraded the US to AA+ from AAA, citing “repeated debt limit stand-offs” and expected fiscal deterioration over the next three years. Biden administration officials objected strenuously, and Janet Yellen criticised the decision as “arbitrary” and “outdated.” Moody’s still rates the US Aaa, its top rating. Lawrence Summers said it’s “absurd” to think there’s a risk the US will default on its debt. Meanwhile, the latest figures pointed to a tight labour market and a slight improvement in manufacturing activities, supporting the dollar. 

Equity markets moved lower in Asia this morning – Nikkei 225 (-2.3%); Hang Seng (-2.5%); Shanghai Composite (-0.9%) – while the S&P Futures are currently predicting a 0.5% decline at the open this afternoon. The FTSE 100 is trading 0.9% lower at 7,597. Sterling trades at $1.2767 and €1.1625.

The Bank of Japan has a long way to go before it raises short-term rates, according to Deputy Governor Shinichi Uchida. Last week’s policy adjustment wasn’t a departure from easing, he said. Separately, minutes of the June meeting showed heated debate over revisions to yield curve control a month before Friday’s tweak, with members concerned any change would be seen as a signal of policy tightening.

Oil climbed to Brent Crude $85.44 a barrel after the biggest drawdown in US inventories since 1982. OPEC’s production tumbled by the most since 2020 in July, a survey showed. The Biden administration is again delaying a replenishment of the US’s emergency oil reserve because of market conditions, people familiar said. The US has stated that it would buy crude when WTI dropped to around $67-$72, vs $80 currently.

Britain’s Energy Security Secretary Grant Shapps will today meet leaders from Shell, BP, SSE, EdF, and National Grid to discuss energy security and accelerating investments into low and zero carbon projects.

Source: Bloomberg

Company News

Yesterday afternoon, Marriott International released strong results for the second quarter of 2023 and once again raised its guidance for the full year. In response, the shares traded up 2%, and provide a positive read-across for industry peer InterContinental Hotels, which reports on next week.

Marriott is the world’s largest hotel company, with nearly 8,600 properties in 140 countries and territories. The company is a fee-driven, asset-light operator with a focus on franchising and management contracts. The group’s 31 leading brands are skewed toward the mid-scale to luxury end of the market, and include: Ritz-Carlton, Marriott, St Regis, Le Meridien, Sheraton, and Le Meridien. At the end of June 2023, the company had more than 1.565m rooms, around a 7% global market share. In June, the group announced its planned entry into the affordable midscale extended stay space in the US and Canada.

During the three months to 30 June, adjusted EPS rose by 26% to $2.26, 4% above the $2.18 expected by the market.

Global revenue per available room (RevPAR) – the key measure of industry performance – increased by 13.5% at constant currency, with occupancy up 4.7 percentage points to 71.9% and average daily rate (ADR) up 6.0% to $183.79.

In the US & Canada, RevPAR grew by 6.0%, with many urban markets showing impressive growth. Business transient revenue also saw strong year-over-year growth, driven by solid average daily rate growth. Leisure transient revenue rose as well, albeit more slowly, as more travellers from the region chose to visit overseas destinations. International markets RevPAR rose by 39.1%, with standout growth in the Asia Pacific ex-China region (+48%) and Greater China (+125%).

Group total revenue grew by 14% to $6.1bn, a touch ahead of the market forecast of $6.0bn. Base management and franchise fees rose by 13% to $1,057m, primarily driven by RevPAR increases and unit growth. Incentive management fees grew 43% to $193m. Owned, leased, and other revenue, net of direct expenses, rose 24% to $103m.

The group continued to expand its estate, adding around c. 33,100 rooms in the quarter, including 17,300 rooms associated with the City Express transaction and roughly 11,200 other rooms in international markets. 2,800 rooms converted from other brands. The pipeline reached more than 547,000 rooms, of which 44% were under construction at the end of the quarter. Following a long-term strategic licensing agreement with MGM Resorts International, the group has lifted its full-year target for net room growth from 4.0%-4.5% to 6.4%-6.7%.

Since the start of 2023, net debt has risen from $9.6bn to $10.7bn. With trading remaining positive, the group has continued to buy back its own shares, with $903m repurchased in the quarter. The group has lifted target capital return for the full year to $4.1bn-$4.5bn.

Looking forward, the group highlights that while the global economic picture is uncertain and conditions could change rapidly, travel demand remains resilient and booking trends solid. RevPAR growth is expected to remain higher internationally than in the US and Canada, where there has been a return to more normal seasonal patterns, and year-over-year RevPAR growth is stabilising. The company has raised its global RevPAR guidance for the full year to 12%-14% (versus 10% to 13% previously) and its EPS forecast to $8.36-$8.65 (versus $7.97 to $8.42 previously).

Source: Bloomberg

Haleon has today released strong results for the first half of 2023 and once again raised its guidance for the full year. In response, the shares are little changed against a weak overall market.

Haleon is the consumer healthcare spun out of GlaxoSmithKline in July 2022. Over the last few years, the company has been built through a series of strategic acquisitions including the Novartis portfolio in 2015 and the Pfizer portfolio in 2019. This has created a leading global consumer healthcare business, which generated £10.9bn in sales in 2022.

The group is the global leader in each of the major categories in which it operates: Therapeutic Oral Health; Vitamins, Minerals and Supplements (VMS); Pain Relief; Respiratory Health; and Digestive Health. Category-leading brands include Sensodyne, Panadol, Advil, Voltaren, Theraflu, Otrivin, and Centrum. As a result, the company is a fairly stable, predictable, and defensive business. The target is to deliver annual organic sales growth of 4%-6% and moderate sustainable margin expansion in the medium term. This will be helped by the group’s restructuring programme, which is expected to result in annualised gross cost savings of c. £300m over the next three years, with the benefits largely expected in 2024 and 2025.

The free float of the company’s shares is limited, and potential sales create an overhang – GSK has retained a small stake (currently 10.3%), which it intends to monetise in a disciplined manner, and Pfizer has retained 32%.

In the first quarter of 2023, sales grew by 10.6% at constant exchange rates (CER) to £5.7bn. Organic growth, which strips out the impact of M&A and currency movements, was 10.4%, with Q2 slightly outpacing Q1 (+9.9%). Growth was made up mainly of price (+7.5%), although volume still grew by a healthy 2.9%. 55% of the group’s business has gained or maintained market share in the year to date, with momentum improved in recent months.

The group’s so-called Power Brands generated organic growth of 10.1%, with Sensodyne, Panadol, and Denture Care among the stand-out performers. The group’s so-called Local Growth brands outperformed, increasing 14.1%, supported by the strong growth in China by Fenbid and Contac.

By geography, the group enjoyed double-digit organic growth in both EMEA & LatAm (+14.9%) and Asia Pacific (+11.6%), and 4.7% growth in North America. By business line, Respiratory Health revenue was particularly strong (+22.0%) helped by a strong cold and flu season in Q1 and by growth in China. Growth was also seen across Pain Relief (+12.9%), Oral Health (+10.8%), and Digestive Health & Other (+7.7%). In VMS, revenue declined by 0.5% organically, largely due to the strong Covid-19 related comparative last year.

The group generates a high gross margin. During the first half, it fell by 50 basis points to 62.3% with pricing and ongoing supply chain and manufacturing efficiency benefits more than offset by higher commodity related costs and cost inflation. Adjusted operating profit grew by 8.9% at CER to £1,271m, with the margin down 40 basis points on a CER basis, to 22.2%. Adjusted EPS fell by 8.3% at CER to 8.5p.

The group generated free cash flow of £369m. Net debt fell from £9.9bn to £9.5bn during the first half, representing 3.4x net debt/adjusted EBITDA. The group is targeting a ratio of less than 3x by the end of 2024. Around £250m is expected to be realised from the disposal of Lamisil by the year end.

The group plans to allocate capital on organic growth, M&A that is consistent with the company’s strategy, and shareholder returns. The dividend policy is to be at the lower end of 30%-50% pay-out ratio range. Today, an interim payment of 1.8p a share has been declared.

Looking ahead, the group continues to expect a challenging environment given further pressure on consumer spending and global geopolitical and macroeconomic uncertainties. However, because of the strong start to the year, full-year organic revenue growth is now expected to be 7%-8%, versus previous guidance to be towards the upper end of the 4%-6% range. The margin is now expected to increase, leading to adjusted operating profit growth of between 9%-11%.

Source: Bloomberg