EFTA01457557

Deutsche Bank Markets Research Rating Hold Europe United Kingdom Pharmaceuticals Pharmaceuticals Company GlaxoSmithKline 08.1L GSK LN EN:mango r:cto/ LSE GSK Updating for margin reset/dilution - smooth execution now critical ineentol eecre Fats out cfedrble !date:. nbvi all about e>ecuhon GSK's 1O results were all but overshadowed by its decision to forgo the planned f4bn B share scheme in return for a longer term commitment to a maintained dividend. Although we view management's long-term targets as achievable/beatable and consistent with our own previous assumptions, a further reset to margin expectations leaves the company more reliant on its accelerated cost savings programme. With question marks remaining over execution and the u-turn over capital allocationNiiV IPO plans bruising credibility with investors, we retain our Hold rating. Reducing 2015.2019E EF'S forecasts by 6-10,:1:; CAGR little changed We have revised our forecasts to reflect dilution from the cancelled B share scheme and a further reset in margins, partly offset by GSK's accelerated E3bn cost saving and synergies programme. This reduces our Core EPS forecasts by 11% in 2015 and 7.8% thereafter. Our "return to growth" assumptions are little changed with a 2015-19E EPS CAGR of 7.6% (from 7.1%) albeit from a significantly lower base. investor confidence in execution and R&D event key to share performance The assumptions set out in our report "Is ViiV the key to a return to growth?" (April 2015) are little changed. These reassure us that a strong contribution from ViiV, along with improving margins within Vaccine and Consumer will drive GSK's return to solid growth even with pressures on its respiratory business. However, with our forecasts now reliant on accelerated materialisation of cost savings/synergies, we expect investors to look for solid evidence of an improvement in execution before rewarding the shares with additional value. We remain skeptical the upcoming R&D day (Nov 3, 2015) will result in a material re-rating based on improved R&D productivity. Risks & Valuation: HOLD, 7I's 1,540p (down from 1,600p) GSK's shares offer potential for mid-to-high single digit future EPS growth (sector median c.5% CAGR) and a near-term above sector average dividend yield (6.5% in 2015 including special dividend and c.5% thereafter vs sector median 3.7%). However, this seems fairly reflected at the shares 17x 2016 PE rating. Our revised 1,540p TP is based on a blend of PE (sector target 17x 2016E) and DCF (WACC 7.9%; TGR 2.5%). Risks include potential for positive impact from strategic change, greater realization of cost savings, improved pipeline prospects and better/worse-than-expected performance in respiratory. E3el : 11 May 2015 Forecast Change Price at 7 May 2015 (GBP) Price Target (GBP) 52-week range (GBP) firnct: ircl l'atko! PILO Research Analyst (.44) 20 754-50470 [email protected] Ton Rate. CIA Research Analyst (+44) 207 54-76522 tirnsaceggclb.com 1,447.00 1.54000 1,643.50- 1,324.00 !Key changes Target Price Sant DereesSeir 1,600.00 to 1 -3.8% 1,540.00 Plic.:013/111thativo 0350 1EOD 1050 IWO 1300 1200 In3 5/12 11/12 5113 11113 3114 /115/ 103 CM IFI•estadl Performance 1%) 1m 3m 12m Absolute -9.1 -4.6 -11.2 FTSE 100 INDEX I., 0.5 1.3 Seca brae. rent Year End Doc 31 2014e 2015E 2016E 2017E Rovonuo (G8Pm) 23.006 24,402 25.313 26.105 08 EPS (GBP) 94.23 77.37 86.79 94.23 OLD DB EPS (GBP) 94.23 85.92 92.58 101.10 %Change 0.0% .10.0% -6.3% -6.8% DB EPS growth (%) -11.5 -17.9 12.2 8.6 PIE (08 EPS) (al 16.2 18.7 16.7 15.4 Swords.* Oa afinifinkscartalle Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0117151 SDNY_GM_00263335 EFTA01457557