Glaxosmithkline Consumer Nigeria Plc


Ticker:                            GLAXOSMITHNature of Business:    PharmaceuticalsLocation :                              Nigeria
Recent Price:           NGN6.80     52-Week High/Low: NGN8.70/3.45Estimated Fair Value:      NGN8.90-NGN11.80
Expected Return:      39.2%Consider Buy:                   Below NGN8.90Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
GlaxoSmithKline Consumer Nigeria Plc (GLAXOSMITH), formerly Beecham Limited, is a leading pharmaceutical company domiciled in Nigeria. It started operations in 1972, one year after it was established. The company was quoted on the Nigerian Stock Exchange in 1977.  GLAXOSMITH is the producer of popular brands such as Panadol, Ampiclox, Andrews Liver Salt and Sensodyne. GlaxoSmithKline Plc UK controls  GLAXOSMITH through SmithKline Beecham Limited UK and Setfirst Limited UK. SmithKline Beecham possesses 19.1% of the issued share capital of GLAXOSMITH while Setfirst owns 27.3% of its outstanding shares.

It sold its drinks business to Suntory Beverages and Foods Nigeria Limited in 2016 for NGN21 billion. Following the disposal, GLAXOSMITH has ceased to produce Lucozade and Ribena which are big brands in the Nigerian market. The drinks business was set up in 1982 as a means of diversifying its sources of earnings.

GLAXOSMITH is licensed by Beecham Group, a member of GlaxoSmithKline, to utilise its brands and inventions. In addition, Beecham Group offers technical support in manufacturing, quality control, training and marketing. GLAXOSMITH has reconstructed its supply network by reaching an agreement with Fidson Healthcare Plc in 2019 to outsource the production of some of its products.

The directors who stepped down in 2019 were Tunde Lemo, Kareem Hamdy and Bhushan Akshikar (managing director).  Kunle Oyelana (managing director), Mark Pfister, Bosco Kirugi and Oludewa Edodo-Thorpe joined the board of directors. Mr. Edmund C. Onuzo remains the chairman of the Board of Directors.

Investment Thesis
GLAXOSMITH is the largest pharmaceutical company quoted on the Nigerian Stock Exchange based on 2019 sales revenue and net profit. But it occupies the second position in terms of 2019 total assets and total equity. It leverages the technological and marketing expertise of the GlaxoSmithKline (GSK) Group to develop and distribute innovative pharmaceutical products to consumers in Nigeria. GSK, which began in 1715, has grown into a global business renowned for vaccines, pharmaceutical and consumer healthcare products.

The contract manufacturing agreement signed with Fidson Healthcare Plc is expected to reduce costs and boost the profit margins of GLAXOSMITH in the medium term. The cost of goods sold amounted to 70.9% of revenue in 2019; it is above the 9-year average cost of sales to turnover ratio of 61.9%.

Profit margins in the sector are low. GLAXOSMITH’s inventory turnover is one of the best in the sector. Its inventory turnover offsets its low-profit margins as stocks are sold and replaced in good time. This is done without necessarily tying up capital in inventory. Good working capital is a plus for the management. It has reduced the need to source for short-term loans to support working capital requirement. Short-term debt at the end of the 2019 financial year was NGN149.5 million. However, the company was debt-free as at 30th September 2020. GLAXOSMITH’s current and acid test ratios surpassed the averages for the sector.

The fair value estimate of a share of GLAXOSMITH is between NGN8.90 and NGN11.80. We maintain a buy recommendation since it is trading below our fair value estimate. Investors should expect a return of 39.2%.

Financial Overview
Revenue of GLAXOSMITH was NGN20.8 billion in 2019, 12.8% up from NGN18.4 billion made in 2018. Over the past three years revenue has grown at a compound rate of 13.1% compared to -15.6% in the earlier year. Cost of sales increase of 17.8% was tantamount to a 3.1% rise in the cost of sale to turnover ratio. Conversely, the cost-of-sales to turnover ratio in the previous financial year was 67.8% having diminished by 4.4% year-on-year. Gross profit only gained 2.1% while operating profit jumped by 35% to NGN790.4 million. Profit Before Tax (PBT) of NGN1.2 billion translated into a marginal improvement of 0.8% in the current period (2019). However, there was a 48.5% surge in Profit After Tax (PAT )owing to a slump in income tax expense for the year.  A PAT of NGN917.1 million was recorded compared to the preceding period’s PAT of NGN617.6 million.

PBT margin of 5.6% trailed the average of nine years by 3.3%.  PAT margin rose from 3.4% to 4.4%. Total assets appreciated by NGN3 billion largely due to a leap in inventories and receivables. Working capital added NGN183.7 billion to close at NGN6.8 billion for the 2019 financial year. But current and acid test ratios dropped 13.4% and 18.8% respectively. Net assets stepped up resulting in book value per share going up from NGN7.39 to NGN7.65. Total equity expanded from NGN8.8 billion to NGN9.2 billion. GLAXOSMITH   is a low-geared company with adequate profit and cash flow to meet debt obligations.

Business Risk
Exchange rate fluctuations could affect production costs and profits as some inputs of the company are sourced from abroad. Competitive pressure makes it difficult for GLAXOSMITH to price its products well above the competition in order to boost profits and margins.

Recommendation: Buy


Earnings Chart of GlaxoSmithKline Consumer Nig. Plc

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