Equity Research Report

Transcription

1 Suntory To Take Over Ribena and Lucozade June 08,

2 Executive Summary (GSK Nigeria) has agreed to sell its Ribena and Lucozade business to Suntory Beverage and Food Limited GSK Nigeria recorded a turnover in excess of the prior period as the pharmaceutical business recorded improved revenue The consumer healthcare segment was negatively impacted by stiff competition and weak consumer purchasing power The decline in the GSK Nigeria s profit indicates the challenges faced by the company as a result of the difficult operating environment The company will continue to focus on its route-to-market and brand activation strategy in order to drive penetration and to improve market share A combination of economic and industry related factors have resulted in marginal growth in GSK Nigeria in the last four years We have not identified a clear strategy that GSK Nigeria will adopt to reinvent its business in the medium term Our forecast shows that the company will grow its revenue at a rate lower than the inflation rate in the medium term We estimate a dividend per share of N0.25 for the FY 2016 (excluding the special dividend of N0.60) Our fair value of the shares of GSK Nigeria is N12.95 We place a SELL on the shares at the current market price of N20 per share. 2

3 GSK Nigeria Agrees to Sell Beverage Unit to Suntory Beverage & Food Limited (SBF) ( GSK Nigeria ) on Wednesday June 01, 2016 announced that it had accepted and is recommending for approval to its shareholders, a binding offer from Suntory Beverage & Food Nigeria Limited for the sale of its beverage unit. The sale will include the manufacturing, bottling, marketing, distribution and selling of Ribena, Lucozade and all assets deployed in connection with the business. Suntory Beverage & Food Nigeria Limited is a subsidiary of Suntory Beverage and Food Limited ( SBF ) of Japan. GSK Nigeria further indicated that the principal terms of the offer will be set out in a circular to shareholders. If the shareholders were to approve the sale, what remains of GSK Nigeria would be its Wellness, Oral healthcare, Nutrition and Pharmaceutical/Vaccines businesses. The company said it would remain listed on The Nigerian Stock Exchange. 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. A special dividend of N716mn to shareholders of the company, representing N0.60 (60kobo) per share will be recommended for approval. Going by our estimate, the contribution of the drinks business to the total revenue of the company is not less than 35%. There are no clear strategies from the company on how to replace the lost revenue. 3

4 Table 1 Rating: SELL Current Price N20.00 Fair Value N12.95 Price Target N12.95 Horizon One Year 1.0 Q Performance Analysis: recorded an improvement in its revenue in Q as a result of the growth in its pharmaceutical business. However, the cost of sales increased leading to a drop in the Gross Profit (GP) The unaudited Q result for the period ended March 2016 shows that Turnover (T/O) increased marginally by 2.52% to N7.64bn, compared with N7.46bn in This increase was mostly as a result of the increased revenue recorded from the pharmaceutical segment. Revenue from the pharmaceutical segment grew by 28.84% to N2.82bn in Q The consumer healthcare segment remains the major contributor to T/O accounting for 63.09% of T/O in Q This segment has however been negatively impacted by stiff competition and weak consumers purchasing power leading to a reduction in revenue from this segment. The cost of The T/O increased by 2.52% to N7.64bn in Q sales increased by 15.06% to N5.22bn from N4.53bn in Q 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% from 60.79% as at Q Selling and distribution expenses fell by 7.80% to N1.47bn in Q while administrative expenses rose by 44.50% to N834.03mn. These operating expenses as a percentage of turnover increased marginally to 30.14% in Q from 29.12% in Q The other operating income stood at N142.49mn as at Q GSK Nigeria recorded a finance income of N5.70mn in Q a % increase from N1.53mn in Q while the finance cost fell by 59.90% to N0.31mn in Q The Profit Before Tax (PBT) fell to N272.91mn, a decrease of 35.54% from N423.40mn in The tax provision also decreased by 33.26% to N84.60mn, from N126.77mn. The Profit After Tax (PAT) was N188.31mn in Q1 2016, from N296.63mn in 2015, There was a decline in the company s profit margins in Q1 2016, compared with Q representing a decrease of 36.52%. There was a decline in the company s profit margins in Q1 2016, compared with Q The increase in the cost of sales and the administrative costs as mentioned above were mainly responsible for the drop in the profit margin. 4

5 Table 2: Financial Performance (N bn) Q Q % T/O EBIT (36.70) PBT (35.54) PAT (36.52) GP* Margin 31.77% 39.21% (7.44%) EBIT Margin 3.50% 5.67% (2.17%) PBT Margin 3.57% 5.68% (2.11%) PAT Margin 2.46% 3.98% (1.51%) *GP- Gross Profit Source: Company Annual Account 2015 and Analysis Given the run rate, the company may fall short of its previous year s performance. The Gross Profit margin decreased to 31.77% in Q while the Earnings Before Interest and Tax (EBIT) margin declined to 3.50% from 5.67% in Q The PBT margin decreased to 3.57% in Q from 5.68% as at Q The PAT margin currently stands at 2.46% in Q1 2016, down from 3.98% in the corresponding period of This result also indicates that the percentage of T/O, PBT, and PAT in the Q to the Audited T/O, PBT and PAT for the period ended December 2015 are: 24.95%, 23.58% and 19.51%, respectively. Given the run rate, the company may fall short of its previous year s performance. Table 3: Quarterly Result Highlights (N'bn) Q Q Q Q Q Turnover PBT PAT Source: Company Annual Account 2015 and Analysis Table 4: Revenue Analysis by Segment Consumer Healthcare Q % of T/O Q % of T/O Oral Healthcare % % OTC % % Nutritional Healthcare 3, % 3, % Total Consumer Healthcare 4, % 5, % Pharmaceuticals Antibacterial 2, % 1, % Vaccines % % Prescription Drugs % % Total Pharmaceuticals 2, % 2, % Total Revenue 7, , Source: Company Annual Account 2015 and Analysis 5

6 The cash and bank balances recorded an increase of 94.61% to N7.08bn in Q from N3.64bn in FY A cursory look at the balance sheet position as at Q compared with the position as at FY 2015 shows a marginal decrease in the company s fixed assets. The total fixed assets decreased by 0.19% to N13.85bn from N13.87bn in FY The inventory decreased by 8.89% to N6.76bn from N7.42bn in FY The cash and bank balances recorded an increase of 94.61% from N3.64bn in FY 2015 to N7.08bn in Q The trade debtors and other receivables decreased in Q by 1.35% to N6.15bn from N6.24bn in the FY 2015 period. The trade creditors and other payables increased by 15.35% to N18.14bn from N15.73bn as at FY The working capital stood at N1.55bn from N1.32bn recorded in FY 2015, while net assets for the period increased by 1.43% to stand at N13.37bn from N13.19bn as at FY 2015 The current ratio stood unchanged at 1.08x as at Q compared with FY This indicates that the company can meet its short-term obligation as and when due. The total assets of the company which stood at N34.02bn as at Q were financed by a mix of equities and liabilities in the ratio of 39.31% and 60.69% respectively. Our analysis of the liabilities shows that the short-term liabilities stood at N18.63bn, accounting for 90.21% of the total liabilities, while the long-term liabilities stood at N2.02bn accounting for 9.79% 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. Our analysis of the cash flow statement in Q shows that GSK Nigeria generated a net increase in cash and cash equivalents of N3.45bn. Net cash from operating activities was a major contributor to cash rising to N3.75bn 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% from 14.80% in This means that less of its revenue translated into cash in 2016 than in Financing Mix (Capital Stucture) 55 Glaxosmith VS NSE Rebased (Jun'15 - Jun'16) Equity 39.31% Debt 60.69% Jun 2015 Jul 2015 Aug 2015 Sep 2015 Oct 2015 Nov 2015 GLAXOSMITH Dec 2015 Jan 2016 Feb 2016 NSE Rebased Mar 2016 Apr 2016 May 2016 Jun

7 N'bn Equity Research Report Q1 Revenue Trend Q Q Q Q Revenue The turnover in FY 2015 increased by 0.37% to N30.63bn. 1.1 FY 2015 Performance Analysis: The Full Year (FY), ended December 2015 result of GSK Nigeria shows a relatively flat topline growth and a decrease in the company s bottom-line performance. T/O increased marginally by 0.37% to N30.63bn, compared with N30.52bn recorded in the corresponding period of This marginal growth in T/O was as a result of the growth in income from Pharmaceuticals particularly revenue from Antibacterial and Prescription drugs. Revenue from Pharmaceuticals grew by 3.62% to N9.44bn. However, the consumer healthcare segment remains the largest contributor to revenue. The cost of sales increased by 2.99% to N20.31bn from N19.72bn recorded in FY Cost of sales as a percentage of T/O rose to 66.29% from 64.61% as at FY The increase in the cost of sales can mostly be attributed to the rise in the cost of raw materials. The cost of raw materials, consumables and good purchased for resale rose by 2.99% to N16.97bn in The administrative, selling and distribution expenses increased by 9.82% to N8.59bn. These expenses as a percentage of T/O increased to 28.03% in FY 2015 from 25.62% in FY Operating profit however declined by 58.21% over the same period. The company recorded a decrease of 27.61% in its finance cost to N3.70bn in FY 2015 from N5.12bn in The company also recorded a fall in investment income of about 43.01% from N59.49bn in FY 2014 to N33.90bn in FY

8 Table 5: Revenue Analysis by Segment FY 2015 % of Total FY 2014 % of Total Consumer Healthcare % % (1.01%) Pharmaceuticals % % 3.62% Total Revenue % % 0.37% Source: Company Annual Account 2015 and Analysis Table 6: Profit Analysis FY 2015 % of Total FY 2014 % of Total % Consumer Healthcare % % (47.79%) Pharmaceuticals % % (57.82%) Total Revenue % % 50.78% Source: Company Annual Account 2015 and Analysis Revenue Analysis By Segment-FY 2015 Profit By Segment - FY % 29.86% 69.18% 70.14% Consumer Healthcare Pharmaceuticals Consumer Healthcare Pharmaceuticals The drop in profit is a reflection of revenue staying relatively flat against an increase in operational costs. The Profit Before Tax (PBT) fell to N1.16bn, a decrease of 57.94% from N2.75bn recorded in the corresponding period of The tax provision decreased by 78.69% to N192.47mn from N903.37mn. Leading to a Profit After Tax ( PAT) of N965.05mn in FY 2015 from N1.85bn in the corresponding period of 2014, representing an decrease of 47.80%. The drop in profit is a reflection of relatively flat revenue against an increase in operational costs. The company s profit margins decreased in 2015 compared with The PBT Margin in FY 2015 decreased over the FY 2014 figure. The PBT margin decreased to 3.78% in FY 2015 from 9.02% as at FY The PAT margin currently stands at 3.15%, down from 6.06% in the corresponding period of The Earnings Before Interest and Tax (EBIT) margin declined to 3.68% from 8.84% in FY 2014, while the Gross Profit margin decreased to 33.71% in FY

9 Table 7: Profitability Analysis (N bn) FY 2015 FY 2014 FY 2013 FY 2012 T/O EBIT PBT PAT GP Margin 33.71% 35.39% 45.84% 40.41% EBIT Margin 3.68% 8.84% 14.24% 15.71% PBT Margin 3.78% 9.02% 14.79% 16.48% PAT Margin 3.15% 6.06% 10.00% 11.16% Source: Company Annual Account 2015 and Analysis 1.2 Analysis of Cash Flow Statement: GSK Nigeria generated a net increase cash flow of N2.54bn in the year 2015, an improvement over the net decrease cash flow of N2.27bn it generated in Cash from operating activities contributed significantly to the cash due to the fact that less of its cash resources were tied down in trade payables. The cash generated from the core operations decreased to N3.66bn in 2015 from N4.81bn in The ratio of the cash generated from core operating activities to the revenue decreased to 11.94% in 2015 from 15.77% in This means that less of its revenue translated into cash in 2015 than in If this is unchecked and not managed accordingly it could lead to the incidence of bad debt. The cash generated from operating activities increased to N6.10bn in 2015 from N2.22bn in 2014 while the net cash generated after tax increased from N1.35bn to N5.13bn. The net cash generated from the operating income was sufficient to cover GSK Nigeria s investment in property, plant and equipment and dividend to its shareholders. Table 8: Cash Flow Analysis Cash Profit From Core Activities Changes In Working Capital 2.44 (2.60) Cash From Operating Activities Income Tax Paid Net Cash From Operating Net Cash Used In Investing (1.87) (2.37) Net Cash Generated by/(used in) Financing Activities (0.72) (1.24) Cash Generated for the Year 2.54 (2.27) Ratio of Cash from Core Operations to Revenue 11.94% 15.77% Ratio of Net Cash from Operation to PPE Investment % 54.58% Source: Company Annual Account 2015 and Analysis 9

10 2.0 Drivers of Performance: The following factors affected the performance of the company: Positive Factors: The growth in the pharmaceutical segment Increased finance income New route to market Brand activation to improve market share Negative Factors: The weak consumers spending power Rising operational and logistical costs Infrastructure challenges in the operating environment Foreign exchange loss. Equity Research Report 2.1 Strategic Focus: GlaxoSmithKline s strategic priority is to continue focus on its route to market and brand activation in order to drive penetration and to improve market share. The company has accepted an offer from Suntory Beverages and Foods Limited to divest its bottling and distribution drinks business. Suntory has a diverse portfolio of soft drink brands. The principal activities of Glaxosmith are manufacturing, marketing and distribution of consumer healthcare and pharmaceutical products. 3.0 Business: The principal activities of GSK Nigeria are manufacturing, marketing and distribution of consumer healthcare and pharmaceutical products. The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK UK). GSK UK controls GlaxoSmithKline Nigeria through Setfirst Limited and Smithkline Beecham Limited who together have a 46.42% stake in Glaxosmith Nigeria. The other 53.54% of Glaxosmith Nigeria shares are owned by Nigerian Shareholders. The registered office of the company is located in Ilupeju with regional sales teams across Nigeria. It also operates from warehouses in Ijanikin and Isolo Lagos. Global Manufacturing and Supply (GMS) is the manufacturing unit of the company and is located in Agbara, Ogun State. 10

11 GSK Nigeria received an offer from Suntory Beverage and Food Limited (SBF) to divest the bottling and distribution of its drinks business. The site provides for the Nigerian market and exports to Ghana. GSK Nigeria has made substantial investments in the expansion of the Agbara factory to manufacture Oral Healthcare and Wellness products. In June 2016 GSK Nigeria accepted an offer from Suntory Beverage and Food Limited (SBF) to divest the bottling and distribution of its drinks business. The company will remain listed on the Nigerian Stock Exchange. It would be recalled that the parent company GlaxoSmithKline Plc (GSK) based in the United Kingdom decided to sell Lucozade and Ribena, its soft drink brands to Suntory Beverage & Food Limited (SBF), for 1.35bn in December Table 9: Shareholding Structure as at December 31, 2014* Shareholders No. of Shares Held % of Shareholding Setfirst Limited 261,725, % Smithkline Beecham Limited 182,790, % Stanbic Nominees Limited 96,486, % Nigerian Public and Institutions 415,699, % Total 956,701, % Both Setfirst Limited and Smithkline Beecham Limited are wholly owned subsidiaries of GlaxoSmithKline Plc UK Source: Company Annual Accounts, * As at December 31,

12 Table 10: Directors Shareholding as at December 31, 2015 Director Position Holdings Mr. Edmund C.Onuzo Chairman 203,504 Mr. Thandalam Dayanand Sriram Managing Director Nil Mr. Jonathan Murray Executive Director Nil Mr. Jonathan Girling Non-Executive Nil Mr. Justin Korte Non-Executive Nil Mr. Chinedum Okereke Non-Executive Nil Mr. Samuel Kuye* Independent Non-Executive 75,739 Mr. Lekan Asuni Non-Executive Nil Mr. Babatunde Lemo Independent Non-Executive 100,000 Mrs. Lubabatu Bello Independent Non-Executive Nil *Joint beneficial holder of the 75,000 ordinary shares held by Stanbic IBTC Asset Management. Holds only 739 shares directly Source: Company Annual Account 2015 and Analysis Table 11: Company Summary Ticker GLAXOSMITH Sector Healthcare Sub-sector Pharmaceuticals Date of Incorporation June 23rd 1971 Date of Listing 1977 Financial Year End December Number of Fully Paid Share 1,195,876,488 Current Capitalization(NGN) 23,917,529,760 NSE Capitalization (NGN) 9,436,438,052, % of NSE Capitalisation Week high NGN Week low NGN YTD Return (%) (40.64) 52 Weeks Average Volume Traded 337,108 Trailing EPS NGN 0.72 Trailing P/E Ratio (X) *As at June 07,

13 About 95% of consumer healthcare products are manufactured in Nigeria from the GMS site in Agbara, Ogun State. 4.0 Product Analysis: GSK Nigeria has two major reporting segments namely; Consumer Healthcare and Pharmaceuticals. Consumer Healthcare consists of oral care, over-the-counter (OTC) medicines and nutritional healthcare. Pharmaceuticals consist of prescription, antibacterial and vaccines. 4.1 Consumer Healthcare: Consumer Healthcare contributed more to GlaxoSmithKline s revenue at 63.09% in Q About 95% of the Consumer Healthcare products are manufactured in Nigeria from the GMS site in Agbara, Ogun state. Consumer health contributed more to revenue at 63.09% in Q The brands in the three sectors under the Consumer Healthcare segment are: Oral Care: Macleans range (Complete Care, Herbal, Intense Whitening, Fresh Mint and Milk Teeth), Sensodyne range (Daily Care, Gentle Whitening, Extra Fresh Mint and Rapid Action) and Parodontax Regular. Competitors in this segment include Close Up, Dabur Herbal, and foreign brands like Crest, Colgate and Listerine. OTC Medicines (Wellness): Panadol range (Regular, Extra, Suspension and Cold & Catarrh), Andrews Liver Salt (Lemon and Orange), Actifed (Syrup and Tablets) and Scotts Emulsion Cod Liver Oil (orange flavour). Competitors include Emzor s Paracetamol range, Fidson Healthcare Tuxil and Avipol range. Nutritional Healthcare: Lucozade range (Boost, Sparkling, Sports and HydroPure), Ribena range (Blackcurrant, Blackcurrant & Pineapple, Blackcurrant & Orange, Blackcurrant & Strawberry, Blackcurrant & Peach and Concentrate) and Horlicks (including Horlicks Malt (UK), Original and Chocolate). Competitors in this segment include Bournvita, Ovaltine, Milo, Rich Chocó, Capri- Sun, Apple & Eve, Bobo drink, Welch s juice, Kool-Aid and La Casera. 13

14 Pharmaceuticals segment contributed 36.91% to total group revenue in Q Pharmaceuticals: Pharmaceuticals segment contributed 36.91% to total group revenue in Q Some pharmaceutical products are imported while others are produced locally. The products under pharmaceuticals include: Antibiotics: Ampiclox, Amoxil Augmentin, Anthelmintic: Zentel Anti-Malaria: Halfan. Competitors in pharmaceuticals include Emzor Pharmaceutical Industries with its range of anti-malaria drugs: Lokmal, Chloroquine and Maldox, range of antibiotics called: Emgyl, Emmox, Emcillin and Kezitil, range of Haematinics namely: Emzoron and Ferrous and Fidson Healthcare with products like Arthemed and E-mal (antimalaria). 14

15 5.0 SWOT Analysis: 5.1 Strengths: o Strong brand name o Diversified portfolio o Quality products in the market o Long standing reputation and reliability 5.2 Weaknesses: o Low profit margin 5.3 Opportunities: o Large market size in Nigeria 5.4 Threats: o Security challenges in the Northern region o Stiff competition in the industry o Foreign exchange risk exposure o Weak purchasing power for consumers. o Poor infrastructure in the country 15

16 6.0 Forecast: Our Forecast Drivers We considered the following factors in arriving at our 5-year forecasts: Positive Factors: New route to market Long standing reputation and reliability Brand activation to improve market share Negative Factors: Sale of beverage business to Suntory Beverage and Food The weak consumer spending power Rising operational and logistical costs Infrastructure challenges in the operating environment Foreign exchange challenges We estimate a dividend per share of 0.25 Kobo for the FY 2016 (excluding the special dividend) We note that the business of GlaxoSmithKline has not recorded substantial growth in Nigeria in the last four years. A combination of economic and industry related factors are responsible for this. We have not identified a clear strategy that GSK Nigeria will adopt to reinvent its business in the medium term. Our forecast shows that the company will grow its revenue at a rate lower than the inflation rate in the medium term. We estimate a Turnover of N24.89bn, N27.38bn, N30.12bn, N31.25bn and N32.41bn for the periods ending December 2016, 2017, 2018, 2019 and We estimate EBIT of N0.56bn, N2.16bn, N2.58bn, N2.83bn and N3.28bn, and EBITDA of N1.92bn, N3.72bn, N4.40bn, N4.97bn and N5.80bn for the same period using EBIT margins of 2.27%, 7.89%, 8.56%, 9.07% and 10.11% respectively. Our PBT forecasts for the periods are: N0.60bn, N2.20bn, N2.62bn, N2.88bn and N3.32bn. Adjusting for tax, our PAT forecasts are N0.50bn, N1.52bn, N1.81bn, N1.99bn and N2.29bn. PAT Margin for the period are 1.99%, 5.54%, 6.00%, 6.35% and 7.07%. Our forecast final dividend for the FY 2016 is N0.25 per share (excluding the special dividend). 16

17 Table 12: Income Statement Actual vs Forecast ( ) =N='bn Dec-15A Dec-16F Dec-17F Dec-18F Dec-19F Dec-20F Turnover (Net Sales) Cost of Sales (20.31) (16.85) (17.06) (18.46) (18.91) (18.96) Gross Profit Admin, Selling & Distribution Expenses (7.14) (5.99) (6.45) (7.09) (7.20) (7.47) Depreciation (1.44) (1.35) (1.56) (1.82) (2.14) (2.53) EBIT EBITDA Net Finance Cost PBT Taxation (0.19) (0.11) (0.68) (0.81) (0.89) (1.03) PAT Source: Company Annual Account 2015 and Analysis Table 13: Ratio Analysis ( ) Dec-15A Dec-16F Dec-17F Dec-18F Dec-19F Dec-20F EBITDA Margin 8.38% 7.70% 13.60% 14.60% 15.90% 17.90% EBIT Margin 3.68% 2.27% 7.89% 8.56% 9.07% 10.11% PBT Margin 3.78% 2.42% 8.03% 8.69% 9.21% 10.25% PAT Margin 3.15% 1.99% 5.54% 6.00% 6.35% 7.07% EPS(N) DPS(N) Dividend Payout 37.18% 60.53% 60.53% 60.53% 60.53% 60.53% Earnings Yield * 2.36% 3.20% 9.80% 11.67% 12.82% 14.80% Dividend Yield * 0.88% 1.94% 5.93% 7.06% 7.76% 8.96% P/E Ratio* Number of Shares (bn) ROCE 7.42% 3.88% 9.73% 10.50% 10.76% 11.31% ROE 7.32% 3.72% 10.44% 11.71% 12.16% 13.17% Collection Days Payment Days Inventory Turnover (x) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Debt Ratio (Total Liabilities /Total Assets) Interest Cover *At Our Fair Value of N12.95 Source: Company Annual Account 2015 and Analysis 17

18 Table 14: Statement of Financial Position Forecast ( ) N'bn Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Property, Plant and Equipment Other Assets Long Term Assets Inventory Trade Receivables Other Receivables Deposits/Balances & Cash Current Assets Total Assets Trade Payables Other Creditors Dividends Current Tax Payable Current Liabilities Working Capital/ Net Current Asset Capital Employed Deferred Taxation Staff Gratuity & Long service awards Long Term Liabilities Total Liabilities Total Net Assets Paid Up Share Capital Share Premium General Reserve Total Reserves Total Equity Total Equity & Liability Source: Company Annual Account 2015 and Analysis 18

19 7.0 Valuation: In arriving at a fair value for the ordinary shares of the company, we used the Discounted Free Cash Flow (DCF) model. We applied a terminal growth rate of 2.79% and used a beta value of 0.70x. We used the yield of 11.97% as our risk free rate, and market premium of 11.15%. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 19.78%. Using 1.20bn shares in issue the DCF model generated N12.95 per share, which is our fair value. The current market value of GSK Nigeria share is N20.00, the highest and the lowest closing prices in the last 52 weeks are N44.99 and N20.00 respectively. The fair value for GSK Nigeria is N The forward earnings yield and dividend yield of the company at our fair value are 3.20% and 1.94% respectively. We expect the share price of the company to drop to N This will represent a deprecation of 35.26% from the current market price. This is clearly higher than a 10% discount on the current market price. We therefore place a SELL rating on the shares of at the price of N20.00 as of June 07, Table 15 : Comparable Analysis (N bn) Company GSK Nigeria May & Baker Fidson Turnover (Net Sales) Gross Profit EBIT PBT PAT GP Margin 33.71% 32.89% 53.00% EBIT Margin 3.68% 8.66% 18.47% PBT Margin 3.78% 1.88% 10.21% PAT Margin 3.15% 0.90% 9.07% ROE 7.32% 2.19% 11.77% Net Assets Net Assets Per Share PE Ratio Earnings Yield* 3.60% 6.09% 24.62% *As at June 07, 2016 Source: Company Annual Account 2015 and Analysis 19

20 Table 16 : Analyst Rating Rating BUY HOLD Criteria Fair value of the stock is 16.65%* compared with the current market price. Fair value of the stock ranges between -10% and 16.65% of the current market price. SELL Fair value of the stock is > 10% below the current market price. *16.65% is our estimated minimum equity return. It is the combination of our risk free rate and risk premium. Our risk free rate is the average yield on a five-year FGN Bond. We adopted a 5% risk premium and set the risk free rate every quarter. Fair Value: This is the value of the ordinary shares of the company using the valuation method appropriate for the company. It is the intrinsic or true value of the stock based on the fundamentals of the company. The market price may either trade at a premium or discount to the intrinsic value. Price Target: This is the price that we believe the shares of the company will trade within our time horizon. Other risk factors may affect the attainment of this price. This price may or not be different from the intrinsic value. 20

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