Should Shareholders Be Worried About GSK’s Future?

When shareholders of GSK Nigeria Plc convenes to meet at its Extra-Ordinary Meeting to be held on the 4th of July 2016 they will probably all unanimously approve the sale of Ribena & Lucozade Boost to Suntory Beverage & Food Limited. It’s a done deal and shareholders will also quickly approve total dividend payout of about N716 million being part proceeds from the sale.

The company is yet to disclose the purchase consideration for the division however we do have a precedent. Back in 2013, GSK UK sold Ribena and Lucozade to Suntory at a purchase consideration of about $2.1 billion and a multiple of 2.5x its revenues. GSK Nigeria’s Nutritional Healthcare division out of which Ribena and Lucozade Boost is part of generated a revenue of about N15.4 billion and N15.8 billion in 2015 and 2014 respectively. However profit after tax was N1.1 billion and N2.7 billion respectively for the division. If the sale goes the way of its UK based Parent Company, then GSK Nigeria could be in for a windfall of about N40 billion. GSK Nigeria has a market capitalization of N21.7 billion (0.7x sales) making such a hefty price highly unlikely.

Price aside, one question that probably won’t be on everyone’s mind is what could be the future value of GSK after the sale? Selling a segment that contributed about 55% of revenues and about 82% of pre-tax profits should get shareholders a little worried. According to inside sources, the company is aligning with to a global strategic direction that will see it focus on a “more lucrative” pharmaceutical segment which includes, Vaccines, Anti-bacteria and prescription drug. Currently that segment contributed revenues of about N9.5 billion and pre-tax profit of about N444 million representing a profit margin of just 4.6%.

It is likely that a major portion of the proceeds of the sale will be invested in the company’s remaining segments and could therefore boost revenues in the medium to long term but will investors be willing to wait that long. At a share price of about N18 and price to earnings multiple of 24x there seems to be only one way next for the stock after this sale which is down. The share price has lost over 46% year to date (YTD) and -10% in the last one month despite its high earnings multiple. GSK will have to do better at outlining its future plans after this sale otherwise the share price may continue to head down south.

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