Company: Glaxo-Smithkline Consume Nig. Plc (GLAXOSMITH)
Current Market Price: N21.39
Fair Value: N26.42
By: Jeariogbe Tunde Segun
Key Financial Tickers:
- The management of Glaxo Simithkline Plc announced a final cash dividend of 40k and special cash dividend of N7.10k
- The 40k represents 98.34% of the 41k earned through the 2017 financial year
- According to the report released through the exchange, the special dividend of N7.10 will be paid from the brought forward retained earnings as at the year ended 31st December, 2017. Please note that a total of N3.229 billion being the profit from the disposal of drink business will be share along the retained earnings.
- As at the full year ended 31st December, 2017, the company has a zero long term liability in its account
- The qualification date for both dividend 23rd of April, 2018, since the closure of registrar books is slated for 24th April to 4th May, 2018
- If approved at the next AGM, the said dividends will be paid on 25th May, 2018, while
- The Annual General Meeting will take place at The Shell Nigerian Hall, Musson Center, Onikan Lagos on the 24th May, 2018
- The management of Glaxo-Smithkline in its attempt to avoid the tough business environment which according to them has induced pressure of higher input cost decided to review its local manufacturing options, an approach it believed will help in addressing its economic and operational challenges.
- In line with this decision, it fully divested from the drinks bottling and distribution business to Suntory Beverage & Food Nigeria Ltd effective from 1st October, 2016
- The new GSK Consumer Healthcare Company (retained business) therefore consist of the;
- Consumer healthcare wellness,
- Oral healthcare and Nutrition categories and
- Pharmaceutical business with
- A portfolio of leading healthcare brands.
- The retained brands includes;
- Andrew liver salts
- Otrivin and
- CAC 1000
- The Turnover (TO) figure improved over comparable year by 11.85% from N14.384 billion to N16.089 billion.
- Profit before Tax (PBT) for the year stood above 2016 earnings by 504% as it currently reported N1.124 billion as against N185.999 million last year.
- The higher PBT reported in the current year was chiefly enhanced by the N1.195 billion realized as Interest Income of Short Term Deposits as against the N171.556 million realized in 2016.
- Nevertheless, Profit for the year reported in 2016 was boosted by Income Tax Credit of N2.192 billion as against the Tax Expenses of N637.83 million reported in 2017
- As noted above, the Total Liability reported for the just concluded financial year is purely current liabilities as the firm currently has no long time liability in its account.
- Since the company has no long term liability, its Debt to Equity is zero percent. Please note that this is against the industrial average of 9.06%. The interpretation of this is that it is running the business with equity and short term loans
- Although Current Ratio of 2.59x stemmed below the industrial average of 3.59x it is a very healthy situation
- Lower than industrial peers at 0.88, Glaxo Smithkline Plc runs a beta value of 0.39, this is also lower that the equities market beta of 1.
- Given the financial status of Glaxo Smithkline, 1.03x investment coverage is okay, although this is far below the industrial average of 46.32x.
- The Cost of Sales Margin increased astronomically from 37.67% to 72.16% in 2017, this is an increase of 91.57%, this is very poor and a question to the profitability of the business in the future. This is despite its divestment from the drinks and bottling business.
- Both Profit before and after Tax Margin are respectively 6.99% and 3.02% as against the 1.29% and 16.53% reported in 2016. Please note that the higher margin estimated from 2016 financial statistics was due to the Income Tax Credit mentioned earlier in this report
- Both Return on Average Equity and Return on Average Assets are equally poor at 2.83% and 1.84%.
- Total Assets Turnover improved by19% from the 51.03% estimated in 2016 to 60.73% in the just concluded financial year.
- Sales almost replicated equity once through the financial year. Please note that it was estimated that the current Turnover figure is 93.70% of the Equity value. This is 11.02% above the 84.40% estimated last year.
- Further testing the management efficiency, we noted that Total Assets replicated the reported Equity value 1.54 times.
- In another ratio, it was established that TO figure duplicated the Fixed Assets in 6.95 times, higher than the 5.21 times achieved in 2016.
- Leading from the noted facts above, estimated amount earned per units share of Glaxo Smithkline (N0.41) stood at 79.55% below the N1.99 earned in 2016 financial year.
- The said Earnings is a yield of 1.84% and 13.73 for the 2017 and 2016 financial year respectively. This is quite low and unimpressive
- Nevertheless, investors seem to be showing higher interest in its share price. This position can be supported by the high and soaring PE/Ratio that moved from 7.28x last year to 54.21x in the year being analysed.
- Price to Book Value is over a unit, this simply implied that the estimated Book Value is lower than the current market price of Glaxo Smithkline unit shares.
- Operating Expenses Margin (Opex Margin) dropped from the 53% of 2016 to 3.02%, this is a poor performance.
We employed a blend of CAPM & Gordon Growth Model to Value Common and Preferred Stock along 2-Stage H Model to determine an intrinsic value for Glaxo-Smithkline. Our valuation only considered the 40k cash dividend which is 98.34% of the 41k EPS for the year ended 31st December, 2018. We are of the opinion that the special dividend is only a one off thing and may result in an overvalued situation if considered. Thus, we finally arrived at N26.42 intrinsic value for each unit of Glaxo-Smithkline shares. On the strength of these we recommend our Hold Rating for Gsk.