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GlaxoSmithKline Nigeria PLC: Strong performance drives share price growth

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GlaxoSmithKline Nigeria PLC: Strong performance drives share price growth

Background

GlaxoSmithKline Consumer Nigeria PLC (GSK), an affiliate of GlaxoSmithKline worldwide, was incorporated in Nigeria on 23rd June 1971 and commenced business on 1st July 1972, under the name Beecham Limited. GSK is a leader in the health and consumer goods space in Nigeria and is led by an ambitious and aggressive management team.

The company was quoted on the Nigerian Stock Exchange in 1977 and manufactures, markets and distributes healthcare as well as consumer products like Ribena fruit juices, Lucozade energy drinks and vaccines.

The company operates an ultra-modern drinks factory in Agbara industrial estate, Ogun State, which has been expanded to include facilities to manufacture Oral Healthcare (OHC) and Wellness products.

Business and Investment Strategy

Consumer health-care sales have been rising 21 percent a year over the past four years in Nigeria, Africa’s most populous country of over 160 million people and biggest oil producer, with GSK adequately positioned to take advantage of that growth.

The company has rolled out marketing and sales initiatives with a strategic priority of continuous improvement and customer focus, with a strong passion for innovation.

GSK has continued to make substantial investments in the Agbara factory in order to maintain an edge over competition. The company completed the installation and commissioning of 150ml and 288 ml lines, facelift and optimization of hot fill lines and other facility upgrades in 2012.

GSK worldwide plc agreed with its Nigerian unit to expand its holding from 46.4 percent to 80 percent, and would give GSK Nigeria the necessary support required for future upgrades which requires significant capital expenditure.

The U.K. Company will buy about 321 million shares at 48 naira a share, for a total of 15.4 billion naira ($98 million).

GSK stock price rose the maximum 5 percent and gained the most in more than three weeks on November 26, 2012 – the day the deal was announced – a sign of investor confidence that the deal is a positive for the share price and company.

Solid Performance for 2012

Investors drove the share price of GSK Nigeria up 96 percent in 2012, a sign of the confidence shareholders have in the business.

Revenues for 2012 rose 18 percent year on year to N25.3 billion, compared to N21.5 billion in Full Year (FY) 2011.Net income for the period increased 23 percent to N2.8 billion, compared with N2.2 billion for FY 2011.

Earnings per Share (EPS) increased 23 percent to N2.95/ share for FY 2012 compared with N2.40/ share in 2011, while a cash dividend of N1.30 was paid for the year equivalent to a dividend yield of 2.24 percent as at June 3rd 2013, when GSK stock price traded at N58/ share.

GSK has a 5-year dividend growth rate of 23.64 percent, while the stock price has returned 197 percent in the past year (June 2012 – June 2013).

Interest charges dropped by 92 percent – a positive for the company – while shareholder (equity) funds rose by 19 percent in FY2012 to N10.6 billion from N8.9 billion in the earlier period.

Gross margins (Cost of sales as a percentage of revenues) remained steady at 59.2 percent for FY 2012, down 30 basis points (bps) from 59.5 percent in FY 2011, a sign that GSK was able to grow revenues as fast as costs, while passing along some higher input costs to customers.

Administrative expenses as a proportion of sales at 5.53 percent were down fifty bps in FY 2012, compared to 5.58 percent in FY 2011, a sign of the good corporate Governance and responsible management team at GSK.

Cash and cash equivalents increased by 16.3 percent to N4.36 billion at the end of 2012, compared with N3.98 billion for FY 2011, even as the net cash flows used in investing in the purchase of property, plants and equipments increased 110 percent to N2.1 billion for FY 2012, compared with N1.07 billion in FY 2011.

This is a sign that the GSK management is confident in the business model and is willing to invest in the business to grow sales and take market share from the competition.

Total assets increased by 21.4 percent to N21.79 billion for FY 2012, from N17.94 billion in the earlier period, driven by trade and other receivables. GSK had a market capitalisation of N55.4 billion as at June 4 2013.

Future Outlook 

The Nigerian economy is expected to expand by 6.8 percent this year, the National bureau of Statistics (NBS) said in February.

The country’s growth rate will average 6.8 percent annually between 2012 and 2017, according to IMF data, while GDP per capita which has risen from $379 to $1,452; over the past decade is expected to hit $1,800 by the end of 2014.

This will drive a stronger demand for consumer goods which GSK is in prime position to take advantage of, as it increases its capacity for local production to meet the growing demand.

GSK’s current price to earnings PE ratio of 19.6 xs is below its 2012 EPS growth rate of 23 percent, suggesting the stock is undervalued, especially if management execution of growth plans which have been solid till date continues in the future.