Another sharp profit drop likely for GlaxoSmithKline

GlaxoSmithKline Consumer Nigeria (GSK) is likely to record a more rapid drop in profit in 2015 than it reported in the preceding year. Revenue growth is flat for the healthcare company for the second year and despite some cost control treatment, symptoms of rising costs are still persisting. One major expenditure item is particularly resistant and that is administrative cost.

Profit margin has dropped to the lowest mark in many years. GSK is therefore headed for lowest profit figure since 2004 based on the second quarter performance. The company lost growth momentum in 2014 and the operating pressure has intensified in the current year.

Sales revenue declined marginally by 1.4% to N15.44 billion year-on-year at the end of the second quarter. Other income lines, including interest income all declined during the period. Revenue growth may however step up in the second half of the year. Turnover is projected at N32. 5 billion for GSK at the end of 2015. This will be a moderate improvement of 6.5% over the sales revenue figure of N30.52 billion the company recorded at the end of last year. This will be a slight improvement from the increase of 4.6% in 2014.

Cost of sales was virtually unchanged at N10.29 billion at the end of the second quarter compared with the corresponding figure last year. It therefore claimed an increased share of sales revenue, which caused a decline of 3.6% in gross profit. Gross profit margin therefore slipped from 34.2% to 33.4% during the review period.

A moderate cost saving was achieved in respect of selling and distribution expenses, which declined by 5.1% year-on-year at the end of June. However administrative expenses rose sharply by 28% to N1.02 billion against the decline in sales revenue. The proportion of sales revenue devoted to administrative expenses increased from 5.1% in the second quarter of last year to 6.6% this year. That caused a drop of 66.1% in operating profit to N400 million at the end of the second quarter.

The company has an operating advantage of a debt free balance sheet and therefore has no significant interest expenses. It continues to maintain a net finance income position though interest income dropped by close to 63% during the review period to N26 million.

The ability to convert revenue into profit has weakened significantly for the second year. Net profit margin has been declining since 2013 from 11.1% in 2012 to 10% in 2013 and further to 6% in 2014. It has fallen further to 1.9% at the end of June this year.

The company earned N297 million in after tax profit at the end of the second quarter, a drop of about 68% year-on-year. After tax profit is projected at N740 million for GSK at the end of 2015. This will be a drop of 60% from the net profit figure of N1.85 billion the company posted in 2014. The company’s after tax profit also dropped by 36.6% at the end of 2014. A more rapid drop therefore looks likely for the company in 2015. The company’s profit hasn’t come this low in more than 10 years. Its peak profit is the N2.92 billion it posted in 2013.

The company earned 31 kobo per share at the end of the second quarter, down from 90 kobo in the same period last year. The full year expectation in earnings per share is 77 kobo compared to N1.93 it reported in 2014. It paid a cash dividend of 75 kobo plus a bonus of 1 for 4 for its 2014 operations. Cash dividend dropped from N1.30, which was maintained in the preceding two years and a further drop appears inevitable in the current financial year.

Major developments in the balance sheet are an increase of 21.5% in trade debtors and other receivables to N8.33 billion and a growth of 18.7% in trade creditors and other payables to N14.11 billion. The company strengthened its cash flow position during the review period with major reductions in net cash utilised for investing and financing activities.