Company Profile
GlaxoSmithKline Consumer Nigeria Plc (GSK) was incorporated in 1971 and is engaged in the manufacturing, marketing and distribution of consumer health care and pharmaceutical products. Owned by GlaxoSmithKline UK (through its wholly owned subsidiary – Setfirst Limited and SmithKline Beecham Plc, both incorporated in UK) and Nigerian investors, GSK’s class of business is health care, pharmaceuticals and vaccines. The company has a 100% holding in Winster Pharmaceuticals Limited. The company’s range of products includes: Panadol, Andrews Liver Salt, Extravite Tonic, Actified, Ribena, Lucozade, and Macleans toothpaste

 

Strategy
Investment in products and infrastructure is continuing. Ribena Apple was introduced into the market, a new campaign for Lucozade apple was also launched. In addition, a complete care variant for Macleans toothpaste was launched. We believe these products have been well accepted by consumers. Furthermore, ongoing investments to upgrade facilities at its Agbara factory will boost performance, as timeliness in production will be achieved. The launch of new products in the market will enlarge its product portfolio and impact performance positively.

Historical performance
Despite government’s strong support for the sector, GSK has performed poorly, achieving 12% growth (compound annual growth rate-GAGR) in top line, while earnings were depressed by some 5%.

Its 2007 results also showed some disappointing figures, with a 5% drop in revenue from N10.4 billion to N9.9 billion and a 23% decrease in operating profit to N1.1 billion from N1.5 billion. Earnings also dropped to N836 million from N1.1 billion, representing a decline of 22.4%. Its major operating ratios are down, though not significantly beyond historical levels: gross margins 39.0% (2006: 39.9%), operating ratio 11.4% (2006: 11.4%), net profit margins 8.4% (2006: 10.4%), and EBITDA margin 15.2% (2006: 17.8%) reflect this. Management, however, insists that these are no cause for concerns as the results were influenced by: the ban on the importation of essential medicines, including antibiotics (which led to the rise in counterfeits) and the adoption of the double combination therapy - ACT, with negative impacts on the company’s business, especially in the first half of Fy2007.

In addition, returns to shareholders dipped by over 900 base points, with RoE and RoCE at 19.1% and 26.6% as against the 28.2% and 39.6% of last year. Compared with the cost of capital of the company (WACC) at 23.0%, we are concerned that shareholders may not be getting the best of deals.

However, the company may have overcome the issues associated with its 2007FY judging by its recently released result for the first quarter ended 31 March 2008, which showed a remarkable improvement in performance. Revenue inched up 38% from N2.2 billion to N3.0 billion, while operating profit also leapt by 126% to N588 million from N260 million. Similarly, earnings showed a strong improvement with a 123% growth to N405 million from N182 million a year ago. Barring any unforeseen circumstances, we expect the company to deliver earnings per share of N1.48 at FY end.

Growth prospect
We anticipate revenue and earnings growth of 15% (CAGR) over the next 10 years. However, over the last six years, it achieved an impressive revenue and earnings growth of 20.8% and 49.8% (CAGR), respectively. We anticipate the company will benefit from macro-economic indices and the increasing purchasing power of Nigerians, which we expect to boost revenue. Investment in plant upgrades, launch of new products and marketing activities will further impact performance.

Valuation
Our fair value estimate for GSK is between N20.9 and N22.1 using DCF, while our 2-stage DDM produced N19.3 and N22.9. At its recent price of N22.8, the shares are fairly valued. However, its trailing PE of 26.0 (historical 22.6) is at par with peers’ 26.4.

Competitive advantages
GSK products are well known and widely accepted across the country. Coupled with its strong innovative capabilities, investment in new products and upgrade of facilities, the company competes favourably in the market place. The re-launch and repackaging of some of its health care products (Macleans, Ribena, etc.) have impacted on performance so far. We expect its products to continue to do well.

Financial strength
We believe GSK is strong financially. Its balance sheet size of N4.6 billion allows it to dominate in the sector. While the company is not overburdened by debt (debt/asset and debt/equity of 47.2% and 89.5%, respectively), its liquidity ratios are encouraging (current and acid test ratios of 1.6 and 0.8, respectively).

Also, the company does not carry any interest bearing obligations and about 91% of its total debt is current in nature. In addition, its interest cover of 145x and debt/earnings of 5x imply that it has no difficulty meeting its debt obligations. Its dividend cover and dividend/cash flow of 2.0x and 1.1x are also encouraging.

Management and corporate governance
We are impressed with the corporate governance and the reporting of the company’s financial information. Its board is composed of knowledgeable people, with Olusegun Osunkeye heading and providing leadership for the board. The board is composed of six non-executive and three executive directors, with three of the non-executive directors from the GlaxoSmithKline Group, the majority shareholder of the company.

Government, regulatory and environmental risk
We believe the activities of NAFDAC have impacted the sector, with reports of improvements in operations. We acknowledge the efforts of government in the war against fake and counterfeit drugs and believe that the sector will continue to benefit from it.