Company: GlaxoSmithkline Consume Nig. Plc (GSK)
Rating: Hold
Current Market Price: N21.39
Fair Value: N26.42
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers
• The management of GSK Plc announced a final cash dividend of 40k for the year ended December 31, 2017.
• The 40k represents 98.34% of the 41 kobo Earnings Per Share (EPS) for the 2017 financial year
• The board also offered a special cash dividend of N7.10k from the sale of a product line.
• 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 its drink business will be share along the retained earnings.
• As at the full year ended 31st December, 2017, the company had zero long-term liability in its account
• The qualification date for both dividends is April 23, 2018, since the closure of register is slated for April 24 to 4th May, 2018
• If approved at the next AGM, the said dividends will be paid on 25th May, 2018
• Meanwhile, the Annual General Meeting holds at The Shell Nigerian Hall, Musson Centre, Onikan Lagos on May 24, 2018

Strength
• The management of GSK, in its attempt to avoid the tough business environment which, they say, has induced pressure in the form of higher input cost, decided to review its local manufacturing options. This approach, it believes, will help address its current economic and operational challenges.
• In line with this decision, it fully divested from the drinks bottling and distribution business, which it sold to Suntory Beverage & Food Nigeria Ltd beginning from October 1, 2016.
• The new GSK Consumer Healthcare Company (retained business) therefore consists:
 Consumer healthcare wellness,
 Oral healthcare and Nutrition categories and
 Pharmaceutical business with
 A portfolio of leading healthcare brands.
• The retained brands are:
 Sensodyne
 Macleans
 Panadol
 Horlics
 Andrews Liver Salts
 Volteren
 Otrivin and
 CAC 1000

Corporate Figures
• The Turnover improved over comparable year by 11.85% from N14.384 billion to N16.089 billion.
• Profit before Tax (PBT) stood above 2016 earnings by 504% as it reported N1.124 billion as against just 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 on Short Term Deposits, as against the N171.556 million realized in 2016.
• Nevertheless, Profit for the year reported in 2017 was boosted by Income Tax Credit of N2.192 billion as against the Tax Expenses of N637.83 million reported in 2018
• As noted above, the Total Liability reported for the just concluded financial year is purely current liabilities as the firm currently has no long-term liability in its books.

Liquidity/Risk Ratios
• Since the company has no long-term liability, its Debt to Equity is 0%. Please note that this is against the industry average of 9.06%. The interpretation of this is that it is running the business with purely on equity and short-term loans
• However, 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, which 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 industry average of 46.32x.

Profitability Ratios
• 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 questions 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%.

Efficiency Ratios
• 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’s 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 5.21x achieved in 2016.

Investment Ratios
• Leading from the noted facts above, estimated amount earned per units share of GSK (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 implies that the estimated Book Value is lower than the current market price of GSK unit shares.
• Operating Expenses Margin (Opex Margin) dropped from the 16.53% of 2016 to 3.02%, this is a poor performance.

Valuation/Recommendation
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 Glaxosmithkline. Our valuation only considered the 40 kobo cash dividend which is 98.34% of the 41 kobo EPS for the year ended December 31, 2018.
We are of the opinion that the special dividend is only a one-off payment and may result in an overvalued situation if considered. Thus, we finally arrived at N26.42 intrinsic value for each unit of Glaxosmithkline shares. On the strength of these we recommend a Hold for the stock.

Technical View

In agreement with the estimated beta value above, technical charts also confirmed a weak trending pattern of the share price of Glaxosmithkline. Technically, the chart pattern revealed a slowing bearish streak, although price seems to be slowing around the current price, we do not identify any near support point. The next visible support identified with its share price is at N25.38.
It was also discovered that the recent upswing experienced is seasonal and common to the full year earnings season. We therefore recommend a Hold for traders.
We are of the opinion also that the stock will trade down for most part of the year.