Suntory to Take Over Ribena and Lucozade; FSDH Places a SELL on GLAXOSMITH


Thursday, June 09, 2016 2:15PM / FSDH Research

Executive Summary

         GlaxoSmithKline Consumer Nigeria Plc (GSK Nigeria) has agreed to sell its Ribena and Lucozade business to Suntory Beverage and Food Limited

         GSK Nigeria recorded a turnover in excess of the prior period as the pharmaceutical business recorded improved revenue

         The consumer healthcare segment was negatively impacted by stiff competition and weak consumer purchasing power

         The decline in the GSK Nigeria’s profit indicates the challenges faced by the company as a result of the difficult operating environment

         The company will continue to focus on its route-to-market and brand activation strategy in order to drive penetration and to improve market share

         A combination of economic and industry related factors have resulted in marginal growth in GSK Nigeria in the last four years

         We have not identified a clear strategy that GSK Nigeria will adopt to reinvent its business in the medium term

         Our forecast shows that the company will grow its revenue at a rate lower than the inflation rate in the medium term

         We estimate a dividend per share of N0.25 for the FY 2016 (excluding the special dividend of N0.60)

         Our fair value of the shares of GSK Nigeria is N12.95

         We place a SELL on the shares at the current market price of N20 per share.


GSK Nigeria Agrees to Sell Beverage Unit to Suntory Beverage & Food Limited (SBF) GlaxoSmithKline Consumer Nigeria Plc (“GSK Nigeria”) on Wednesday June 01, 2016 announced that it had accepted and is recommending for approval to its shareholders, a binding offer from Suntory Beverage & Food Nigeria Limited for the sale of its beverage unit.

The sale will include the manufacturing, bottling, marketing, distribution and selling of Ribena, Lucozade and all assets deployed in connection with the business. Suntory Beverage & Food Nigeria Limited is a subsidiary of Suntory Beverage and Food Limited (“SBF”) of Japan. GSK Nigeria further indicated that the principal terms of the offer will be set out in a circular to shareholders.

If the shareholders were to approve the sale, what remains of GSK Nigeria would be its Wellness, Oral healthcare, Nutrition and Pharmaceutical/Vaccines businesses. The company said it would remain listed on The Nigerian Stock Exchange.

GSK Nigeria has indicated that subject to the completion of the disposal and receipt of the purchase price the company will pay a special dividend. A special dividend of N716mn to shareholders of the company, representing N0.60 (60kobo) per share will be recommended for approval.

Going by our estimate, the contribution of the drinks business to the total revenue of the company is not less than 35%. There are no clear strategies from the company on how to replace the lost revenue.

Q1 2016 Performance Analysis

GlaxoSmithKline Consumer Nigeria Plc recorded an improvement in its revenue in Q1 2016 as a result of the growth in its pharmaceutical business. However, the cost of sales increased leading to a drop in the Gross Profit (GP) The unaudited Q1 2016 result for the period ended March 2016 shows that Turnover (T/O) increased marginally by 2.52% to N7.64bn, compared with N7.46bn in 2015.

This increase was mostly as a result of the increased revenue recorded from the pharmaceutical segment. Revenue from the pharmaceutical segment grew by 28.84% to N2.82bn in Q1 2016. The consumer healthcare segment remains the major contributor to T/O accounting for 63.09% of T/O in Q1 2016. This segment has however been negatively impacted by stiff competition and weak consumers’ purchasing power leading to a reduction in revenue from this segment.

The cost of sales increased by 15.06% to N5.22bn from N4.53bn in Q1 2015. This can be linked to the increase in the prices of raw materials. The cost of sales as a percentage of T/O increased to 68.23% from 60.79% as at Q1 2015. Selling and distribution expenses fell by 7.80% to N1.47bn in Q1 2016 while administrative expenses rose by 44.50% to N834.03mn. These operating expenses as a percentage of turnover increased marginally to 30.14% in Q1 2016 from 29.12% in Q1 2015.

The other operating income stood at N142.49mn as at Q1 2016. GSK Nigeria recorded a finance income of N5.70mn in Q1 2016 a 272.50% increase from N1.53mn in Q1 2016 while the finance cost fell by 59.90% to N0.31mn in Q1 2016. The Profit Before Tax (PBT) fell to N272.91mn, a decrease of 35.54% from N423.40mn in 2015.

The tax provision also decreased by 33.26% to N84.60mn, from N126.77mn. The Profit After Tax (PAT) was N188.31mn in Q1 2016, from N296.63mn in 2015, representing a decrease of 36.52%. There was a decline in the company’s profit margins in Q1 2016, compared with Q1 2015. The increase in the cost of sales and the administrative costs as mentioned above were mainly responsible for the drop in the profit margin.

The Gross Profit margin decreased to 31.77% in Q1 2016 while the Earnings Before Interest and Tax (EBIT) margin declined to 3.50% from 5.67% in Q1 2015. The PBT margin decreased to 3.57% in Q1 2016 from 5.68% as at Q1 2015.

The PAT margin currently stands at 2.46% in Q1 2016, down from 3.98% in the corresponding period of 2015. This result also indicates that the percentage of T/O, PBT, and PAT in the Q1 2016 to the Audited T/O, PBT and PAT for the period ended December 2015 are: 24.95%, 23.58% and 19.51%, respectively.

Given the run rate, the company may fall short of its previous year’s performance.


A cursory look at the balance sheet position as at Q1 2016 compared with the position as at FY 2015 shows a marginal decrease in the company’s fixed assets. The total fixed assets decreased by 0.19% to N13.85bn from N13.87bn in FY 2015. The inventory decreased by 8.89% to N6.76bn from N7.42bn in FY 2015.

The cash and bank balances recorded an increase of 94.61% from N3.64bn in FY 2015 to N7.08bn in Q1 2016. The trade debtors and other receivables decreased in Q1 2016 by 1.35% to N6.15bn from N6.24bn in the FY 2015 period.

The trade creditors and other payables increased by 15.35% to N18.14bn from N15.73bn as at FY 2015. The working capital stood at N1.55bn from N1.32bn recorded in FY 2015, while net assets for the period increased by 1.43% to stand at N13.37bn from N13.19bn as at FY 2015

The current ratio stood unchanged at 1.08x as at Q1 2016 compared with FY 2015. This indicates that the company can meet its short-term obligation as and when due. The total assets of the company which stood at N34.02bn as at Q1 2016 were financed by a mix of equities and liabilities in the ratio of 39.31% and 60.69% respectively.

Our analysis of the liabilities shows that the short-term liabilities stood at N18.63bn, accounting for 90.21% of the total liabilities, while the long-term liabilities stood at N2.02bn accounting for 9.79% of the total liabilities. The long-term liabilities constituted mainly of deferred tax liabilities, which stood at N1.84bn. The short-term liabilities constituted mainly of trade creditors and other payables.

Our analysis of the cash flow statement in Q1 2016 shows that GSK Nigeria generated a net increase in cash and cash equivalents of N3.45bn. Net cash from operating activities was a major contributor to cash rising to N3.75bn in Q1 2016, mostly as a result of adjustments for increase in trade and other payables. The ratio of the cash generated from core operating activities to the revenue decreased to 9.96% from 14.80% in 2015. This means that less of its revenue translated into cash in 2016 than in 2015.


In arriving at a fair value for the ordinary shares of the company, we used the Discounted Free Cash Flow (DCF) model. We applied a terminal growth rate of 2.79% and used a beta value of 0.70x.

We used the yield of 11.97% as our risk free rate, and market premium of 11.15%. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 19.78%. Using 1.20bn shares in issue the DCF model generated N12.95 per share, which is our fair value.

The current market value of GSK Nigeria share is N20.00, the highest and the lowest closing prices in the last 52 weeks are N44.99 and N20.00 respectively. The forward earnings yield and dividend yield of the company at our fair value are 3.20% and 1.94% respectively.

We expect the share price of the company to drop to N12.95. This will represent a deprecation of 35.26% from the current market price. This is clearly higher than a 10% discount on the current market price.

We therefore place a SELL rating on the shares of GlaxoSmithKline Consumer Nigeria Plc at the price of N20.00 as of June 07, 2016.

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