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Company Analysis

GlaxoSmithKline Strips Assets To Improve Bottom Line

Posted: Oct 4, 2016 at 4:10 am   /   by   /   comments (0)


Kirk Leigh


As at Independence Day, GlaxoSmithKline divested from its drinks bottling and distribution firm in a move to raise capital and manage its financial structure, thus handing over the iconic Ribena and Lucozade drinks to Suntory Beverage and Food Nigeria Limited.

The sale comes on the heels of a positive forecast for the drinks and beverages sector by BMI Research which predicts a 12.5 percent growth for non-alcoholic drinks in 2016 with a compound annual growth rate of 13.1 percent between 2015 and 2020. This is in the face of a contraction in the “food and drink industry” in 2016 “due to an acute decline in per capita food spending”.

It has been a particularly tough period for manufacturers who like GlaxoSmithKline decry the scarcity of dollars to acquire critical inputs leading to dips in bottom-line. The company’s half year losses for the 2016 fiscal year illustrate this challenge.

Revenues fell sharply by almost ten percent on the back of eroding purchasing power and weakening naira to N13.96 billion from N15.44 billion achieved in the equivalent period in 2015. The company attempted moderating the situation by putting speed breakers to cost of sales, pushing it down 3.53 percent. But it wasn’t enough to buoy gross profit, the crucial top line profit figure and first indication of the direction of profitability. Gross profit sank 21.64 percent to N4.04 billion from N5.16 billion. This resulted in a fall in gross margin to 29 percent from 33.4 percent.

Selling and distribution costs rose in the period. So did admin expenses, leading to almost ten times reduction in pre-tax profits, putting the pharmaceutical company in the red with PBT of negative N3.62 billion, down from N424.8 million achieved in the equivalent period in 2015.

Not even a 30 percent reduction in tax liabilities in the period could prevent net profit from travelling further south to a negative N3.71 billion or over a thousand percent less than the N297.3 million achieved earlier.

The company’s share price has since declined to N19.60 as of September 29, or a drop of 21 percent since the last time independent analysts looked at the company in early March 21. Analysts are not optimistic of the company’s outlook in the near term as indicated by the Financial Times poll of analysts following the stock.

“As of September 23, 2016, the consensus forecast amongst two polled investment analysts covering GlaxoSmithKline Consumer Nigeria Plc advises that the company will underperform the market. This has been the consensus forecast since the sentiment of investment analysts deteriorated on September 5, 2016. The previous consensus forecast advised investors to hold their position in GlaxoSmithKline Consumer Nigeria Plc.”

According to the FT, “The two analysts offering 12-month price targets for GlaxoSmithKline Consumer Nigeria Plc have a median target of N16.98, with a high estimate of N21.00 and a low estimate of N12.95. The median estimate represents a -13.39% decrease from the last price of N19.60”.

There were early signs in the company’s full year 2015 results to indicate tough times in 2016. Pre-tax profit was N1.16 billion on a N30.63 billion revenue, which was less than 1 percent improvement over the 2014 showing.

The pre-tax returns of GlaxoSmithKline slumped to N1.16 billion, less than half what the company achieved in the 2014 when it made PBT of N2.75 billion.

The heavy toll was also seen in the PBT margin which took a shave to settle at 3.8 percent from 9 percent.

Net profit sank by a scary 47.3 percent to paint a rather sad picture of how asphyxiating government policy can be to a business. It fell to N965 million from N1.83 billion. But the figure was helped by a massive reduction in tax obligation, which was more than four times lower than the previous year’s.

This also had the effect of constraining net profit margin given the slothful movement of sales.

GlaxoSmithKline is one of the world’s leading research-based pharmaceutical and healthcare companies, headquartered in the UK with major business operations in the US, employing over 97,000 people in over 100 countries.

The company’s mission, according to information gleaned from its website, is to “improve the quality of human life by enabling people to do more, feel better and live longer.

“In Nigeria, GlaxoSmithKline has been a dominant and leading force in the healthcare industry, having a strong presence in the country for the past 40 years. GlaxoSmithKline operates globally with business units focused on pharmaceuticals, vaccines and consumer healthcare products.”