As shareholders of Glaxosmithkline Consumer Nigeria Plc prepare to cede its drinks business to Suntory Beverages Nigeria Limited, Goddy Egene examines the impact on the company’s operations and its ability to still deliver returns to its shareholders

Lucozade and Ribena are very popular brands on the stable of Glaxosmithkline Consumer Nigeria Plc. In fact, due to the popularity of these two products, many stakeholders easily forget that GSK Nigeria is one of the leading companies in pharmaceuticals industry. The company, in its healthcare segment, has brands such as Macleansrange, Sensodyne range and Parodontax Regular. Panadol range, Andrews Liver Salt, Actifed and Scotts Emulsion Cod Liver Oil.

Despite these products, some stakeholders have been apprehensive about the news of the company divesting its drinks bottling business that manufactures Lucozade and Ribena to Suntory Beverages Nigeria Limited. The planned divestment followed the purchase of the business by Suntory Beverages Japan from GSK United Kingdom, the parent firm of GSK Nigeria in 2013.

Although GSK UK had since handed over its other drinks bottling business to Suntory, there was an agreement for GSK Nigeria to continue to manufacture the products in Nigeria.
However, Suntory Beverages Nigeria Limited wants to be manufacturing the products hence the move to take over the company. Already the Board of GSK Nigeria has accepted the offer and recommended that shareholders of the company approve the divestment subject to regulatory approval.

GSK Nigeria further indicated that the principal terms of the offer will be set out in a circular to shareholders. If the shareholders approve the sale, what remains of GSK Nigeria, would be its Wellness, Oral healthcare, Nutrition and Pharmaceutical/Vaccines businesses and would remain listed on the Nigerian Stock Exchange (NSE).
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 of N716 million(60 kobo per share) will be recommended for shareholders’ approval.

Company’s position
Explaining the divestment, an official of the company recently said: “The drinks bottling used to be part of our business but we belong to a group, GSK, which has divested from that line of business and we need to maximise our potential. We are facing the direction our parent company is facing. Other subsidiaries have divested the drinks business but Nigeria was allowed to continue. But the divestment will enable us release the assets to Suntory Beverages so that we can concentrate on those things we are good at,” an official of the company said.

The official said the divestment will give the company a lot of potential to grow its business, saying as a forward looking company it has hedged against the impact of the divestment.

In a notification to the NSE, the Company Secretary of GSK Nigeria, Mr. Uche Uwechai had said the principal terms of the offer would set out in a circular to the shareholder.
“If the shareholders and regulators were to approve the sale, the retained business of GSK Nigeria would include its wellness, oral healthcare, nutrition and pharmaceutical/vaccines businesses and the company would remain listed on the NSE,” he said.

Financial performance
GSK recorded an increase in turnover for the first quarter (Q1) ended March 31, 2016 but profit declined. Turnover (T/O) increased marginally by 2.52 per cent to N7.64 billion in 2016, up from N7.46 billion in 2015. According to analysts at FSDH Merchant Bank research, the increase in turnover was mostly as a result of the increased revenue recorded from the pharmaceutical segment. Revenue from the pharmaceutical segment grew by 28.84 per cent to N2.82 billion in Q1 2016.

The consumer healthcare segment remains the major contributor to T/O accounting for 63.09 per cent 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. Going by the forgoing, the divestment will have negative effect on its performance on the short and medium term. This is so because there is no strong indication that consumer purchasing power will improve and competition will reduce soon.

The cost of sales increased by 15.06 per cent toN5.22billion from N4.53billion 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 per cent from 60.79 per cent as at Q1 2015. Selling and distribution expenses fell by 7.80 per cent to N1.47 billion in Q1 2016 while administrative expenses rose by 44.5 per cent to N834.03 million,” they said.
GSK Nigeria recorded a finance income of N5.70 million in Q1 2016 a 272.50 per cent increase from N1.53 million in Q1 2015 while the finance cost fell by 59.90 per cent to N0.31mn in Q1 2016.

However, Profit Before Tax (PBT) fell to N272.91 million, a decrease of 35.54 per cent from N423.40 million in 2015, while Profit After Tax (PAT) was N188.31 million in Q1 2016, from N296.63 million in 2015, representing a decrease of 36.52 per cent. 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,” FSDH said.

Balance sheet position
The company’s balance sheet position as at Q1 2016 compared with the position as at fully year (FY) 2015 indicates a marginal decrease in the company’s fixed assets. The total fixed assets decreased by 0.19 per cent to N13.85 billion from N13.87 billion in FY 2015. The working capital stood at N1.55 billion from N1.32 billion recorded in FY 2015, while net assets for the period increased by 1.43 per cent to stand at N13.37 billion from N13.19 billion as at FY 2015.
The total assets of the company, which stood at N34.02 billion as at Q1 2016 were financed by a mix of equities and liabilities in the ratio of 39.31 per cent and 60.69 per cent respectively.

“Our analysis of the liabilities shows that the short-term liabilities stood at N18.63 billion, accounting for 90.21 per cent of the total liabilities, while the long-term liabilities stood at N2.02billion accounting for 9.79 per cent 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,” analysts said.

Cash flow
An analysis of the company’s cash flow in Q1 shows that it generated a net increase in cash and cash equivalents of N3.45 billion. Net cash from operating activities was a major contributor to cash rising to N3.75 billion 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 per cent from 14.80 per cent in 2015.
“This means that less of its revenue translated into cash in 2016 than in 2015. The cash and bank balances recorded an increase of 94.61 per cent to N7.08 billion in Q1 2016 from N3.64 billion in FY 2015,” the analysts said.

Impact of divestment
Analysts at FSDH said going by their estimate, the contribution of the drinks business to the total revenue of the company is not less than 35 per cent. They added, however, that there are no clear strategies from the company on how to replace the lost revenue. Besides, they see the divestment as one of the negative factors that would affect the company’s performance going forward. Other factors they identified are: The weak consumer spending power, rising operational and logistical costs, infrastructure challenges in the operating environment and foreign exchange challenges.

“We have not identified a clear strategy that GSK Nigeria will adopt to reinvent its business in the medium term,” they said.
On the positive side, the analysts cited the company’s new route to market, long standing reputation and brand activation to improve market share.
According to their forecast, GSK will grow its revenue at a rate lower than the inflation rate in the medium term.

They estimate a turnover of N24.89 billion, N27.38 billion, N30.12 billion, N31.25 billion and N32.41 billion for the periods ending December 2016, 2017, 2018, 2019 and 2020.

“We estimate earnings before interest and tax(EBIT) of N0.56 billion, N2.16 billion, N2.58 billion, N2.83 billion, and N3.28 billion, and earnings before interest, tax depreciation and amortisation (EBITDA) of N1.92 billion, N3.72 billion, N4.40 billion, N4.97 billion, and N5.80 billion, for the same periods, they said.

The analysts projected PBT and PAT of N0.60 billion, N2.20 billion, N2.62 billion,N2.88 billion, N3.32 billion and N0.50 billion, N1.52 billion, N1.81 billion, N1.99 billion, and N2.29 billion in 2016, 2017, 2018, 2019 and 2020 respectively.