GSK: Analysts Upgrade Stock as Earnings Swing Despite Revenues Drop
GlaxoSmithKline Consumer Nigeria Plc (GSK) topline came weak, though the pharmaceutical company’s profit improves in the first quarter of 2020.
In the first quarter of 2020, GSK’s revenue dropped off to ₦4.989 billion from ₦5.013 billion in the comparable quarter in 2019.
With COVID-19 in the street, analysts had expected higher revenue for the period.
The company’s earnings ratio was strengthened though analysts observed downside risk to the future earnings capability of the company.
Setting a lower price target of ₦7.11 for 2020, equity research analysts at Meristem Securities advised investors to Hold GSK stocks.
On the floor of the Nigerian Stock Exchange, GlaxoSmithKline stock traded at ₦7.10 on Thursday.
The last 7-day trading record shows that the company stock had peaked at ₦7.55 but started dropping after the release of Q1 result.
Year to date, GSK stocks has gained more than 16% from the opening price and its market capitalisation settled at ₦8.94 billion.
The Financials:
GSK rounded off the 2019 financial year on a solid note, posting a year on year revenue growth of 12.76% to ₦20.76 billion.
As usual, the growth was spearheaded by revenue from the pharmaceutical division, which jerked up by 21.15% to ₦14.48 billion.
Revenue from the consumer business unit, however, gave in to the competition, contracting by 2.78% to ₦6.28 billion from ₦6.46 billion in 2018.
However, in the first quarter of 2020, the firm recorded a marginal moderation in its revenue year on year, down by 0.48% to ₦4.99 billion.
Revenue from the pharmaceutical division contracted slightly by 1.14% to ₦3.46 billion as against ₦3.50 billion in Q1:2019.
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In contrast, the firm recorded a 1.03% growth in revenue from the consumer unit to ₦1.53 billion during the period.
Meristem Securities said given the essential nature of the firm’s products and the impact of COVID-19 induced demands on the pharmaceutical industry, the firm anticipates an improvement in performance in the coming quarters.
In addition, Meristem said the firm typically records higher volume in the second-half, lending credence to its expectation of an improved performance at the end of the financial year.
“Against this backdrop, we project an 8.94% growth in topline to ₦22.62 billion in 2020”, analysts at Meristem stated.
Costs Remain a Pressure Point:
In the review, Meristem explained that cost remains pressure point for GSK.
In line with the revenue growth in 2019, direct costs expanded by 26.20% to ₦14.71 billion.
Analysts attributed this as driven solely by a 30.35% increase in the value of raw materials consumed.
Consequently, cost to sales trended upwards to 70.85% from 63.30% in financial year 2018.
However, the firm recorded a moderation in operating expenses by 1.52% on the back of a 13.92% decline in administrative expenses.
In Q1:2020, direct costs declined by 1.31%, slightly moderating cost-to-sales to 69.97% from 70.56% in the corresponding period last year.
Operating expenses, however, took a different turn, advancing by 8.46% to ₦1.32 billion.
This came on the back of a 10.55% spike in travel expense, 66.66% hike in telecom cost, 71.73% upsurge in rent and the recognition of impairment on receivables amongst others.
“In line with our revenue growth projection, we anticipate an increase in costs particularly raw materials and logistics”, Meristem stated.
Hence, analysts said they expect the firm to record a cost-to-sales of 72.05% in financial year 2020.
Improvement in Profitability Ratios
Premised on the improvement in revenue, moderation in operating costs and the significant decline in effective tax rate (down to 21.57% from 46.76% in 2018), GSK reported an expansion of 48.49% in earnings to ₦917 million in 2019.
On this note, the firm’s return on equity improved to 10.20% compare to 9.63% in 2019 while EPS also expanded to ₦0.77 from ₦0.52 in the corresponding period last year.
GSK sustained the growth momentum, as earnings advanced by 10.77% to ₦113 million in Q1:2020.
The firm recorded an uptick in ROE to 1.22% from 1.12% in Q1:2019, while EPS remained flat at ₦0.09.
Meristem explained that while the firm hold a positive outlook for GSK’s performance in the near term, the heightened possibility of a surge in raw materials and logistics costs on the back of lockdown and export restrictions across countries, pose a significant downside risk.
Analysts at Meristem however expect GSK to post a net margin of 4.17% in 2020 from 3.69% in financial year 2019.
A slight improvement was recorded in the firm’s working capital ratios due to a 5.69% decline in trade payables and a complete payment of its overdraft facility.
Current ratio, therefore, improved slightly to 1.78x from 1.71x in 2019.
Premised on all of the above, our target price has been revised upwards to ₦7.11, based on our target price earnings of 9x and an expected EPS of ₦0.79.
“We, therefore, recommend a HOLD rating on the ticker”, Meristem Securities tell customers.
GSK: Analysts Upgrade Stock as Earnings Swing Despite Revenues Drop
