Business Overview
GlaxoSmithKline Plc (GSK.L) is a healthcare company, which focuses on the development, manufacture and commercialisation of pharmaceuticals, vaccines and consumer healthcare products. It offers drugs for the treatment of HIV, respiratory, cancer, immuno-inflammation, anti-viral, central nervous system (CNS), metabolic, cardiovascular and urogenital, anti-bacterial, dermatology and rare diseases. The company offers over-the-counter (OTC) products for pain relief, oral health, nutrition, skin health and gastrointestinal disorders. Its area of operations categorised into three segments which are Pharmaceuticals, Vaccines and Consumer Healthcare products. In FY18, GSK's 57.2% of total group's revenue came from Pharmaceuticals, 25.7% from Consumer Healthcare and 17.1% came from Vaccines business. On geographical contribution standpoint, group's 38.8% of total revenue came from the United States, Europe contribution was around 25.8%, and the International sales contributed approximately 35.3% to the top-line as per FY18 annual report.

Key Statistics

(Source: Financial Times)

Recent Developments

On 6^th February 2019, GSK reported its full-year results for the period ended 31^st December 2018; sales were up by 2 per cent during FY18. On 5^th February 2019, Company announced its global alliance with Merck, Germany to develop and commercialise M7834. On 22^nd January 2019, Group completed its takeover of TESARO, an oncology biopharmaceutical company. On 21^st January 2019, Company announced that Sir Philip Hampton had shown his intention to step down from the post of non-executive Chairman.

Top Shareholders

(Source: TR)
 
 
Financial Performance – FY18

(Source: Company Annual Report FY18)

Highlights

GSK’s revenue for FY18 stood at £30.8 billion, compared with £30.1 billion in FY17. Revenue grew by 5% on a constant currency basis (CER) and by 2% on annual equivalent rate (AER). During the financial year 2018 Pharmaceuticals business revenue stood at £17.3 billion, up by 2% CER. In FY18 Vaccines business grew by 14% on basis AER and by 16% on a CER basis at £5.9 billion. Consumer Healthcare business sales grew by negative 1% on AER basis and by 2% on a CER basis at £7.7 billion in FY18. In FY18, New Respiratory products sales stood at £2.6 billion, up by 35% on AER basis and by 38% on a CER basis. During FY18, HIV sales stood at £4.7 billion, up by 9% on AER basis and by 11% on a CER basis. Sales from Shingrix stood at £784 million, increased above 100% on AER basis, and also above 100% on a CER basis. Gross margin for FY18 stood at 17.8%, improved 430 basis points on AER basis and by 500 basis points on a CER basis. For FY18, Group's adjusted operating margin stood at 28.4%, improved by 50 basis points on a CER basis. Earning Per Share of the group stood at GBX 73.7, up by more than 100% on AER basis and by more than 100% on a CER basis as well. For FY18, net cash flow from operation stood at £8.4bn, and free cash flow stood at £5.7bn, due to improved focus on cash conversion, primarily working capital. During Q4 FY18 company declared a dividend of 23 pence and a dividend of 80 pence for full-year FY18. During FY18, the group announced four significant deals including consumer healthcare joint venture to support strategy.

Stock Performance – 1 Year
 

(Source: TR)

Commentary

At the time of writing (on 06-Mar-2019) before the market close, shares of GSK was quoting at GBX 1,518.30, added 2.6 points or up by 0.19% against its previous day close. During last one-year shares have reached a 52w high of GBX 1,648.8 and a 52w low of GBX 1,269.8. At the time of writing shares were trading 7.98% below its 52w high and 19.4% above its 52w low, which indicates potential upside movement in the near term. In last one-year GSK’s stock has delivered a return of 15.8% (as at 06-Mar-2019) relatively higher than the benchmark index FTSE 100. Group’s Dividend Yield of 5.28% (as on 06-Mar-19) is considerably higher against its peers operating within the same line of business. Stock's Beta of 1 indicates that movement in the stock is highly correlated with movement in the benchmark index. At the current market price, the stock is trading above its 60 days simple moving average by 0.66% and 0.99% below it 200 simple moving average (SMA), which indicates stock has potential to break its 200day simple moving average. Stock 5day average daily volume traded in the London Stock Exchange is 15.03% below its 30day average daily volume. Group's outstanding market capitalisation of £75.40 billion ranks it among the top large-cap stock trading on the London Stock Exchange (LSE).

 
Financial Ratios and Valuation Methodology

Ratios

(Source: TR)

Commentary

Gross margin for FY18 stood at 68.5%, 250 basis points below its peers median, and declined by 60bps as compared to FY17 gross margin of 69.1%. The company has delivered consistently an EBITDA margin above 30% since last many years which shows the fundamental strength of a company. This trend is uncommon and indicates management efficiency as well. Operating margin improved by 390bps in FY18 at 17.8% against FY17 operating margin and stood marginally above the industry median of 17.4%. Net Margin improved significantly during FY18 to 13.5% compared with 10.8% in FY17. Also, GSK’s net margin for FY18 stood relatively higher against its peers’ group dealing within the same line of business. At liquidity front in terms of current ratio, GSK’s current ratio of 0.75 was considerably below the industry median of 1.79 but improved marginally as compared to the FY17 current ratio of 0.60. On leverage front, the company is highly leveraged as compared with its peers dealing among the same industry.

Valuation Methodology

Valuation Method 1 (NTM EBITDA (FY19E) approx.)

 
While valuing GSK on EV/EBITDA multiple, we have considered NTM EV/EBITDA multiple of its peers which were Sanofi SA (NTM EV/EBITDA of 12.x), Novartis AG (NTM EV/EBITDA of 14.x), Roche Holding AG (NTM EV/EBITDA of 13x), AstraZeneca PLC (NTM EV/EBITDA of 14x), Novo Nordisk A/S (NTM EV/EBITDA of 13x), Ucb SA (NTM EV/EBITDA of 10.6x), and Bayer AG (NTM EV/EBITDA of 10.5x).

Valuation Method 2

Note: All forecasted figures and peers have been taken from Thomson Reuters. 

Prospects

As per management estimates, EPS could decline by 5% to 9% on a constant currency basis on account of new consumer healthcare joint venture with Pfizer. However, management expects to maintain the dividend for FY19 at 80 pence per share.

Key Risks

Foreign exchange risk

Brexit Uncertainties

Conclusion

GlaxoSmith is a giant pharmaceutical and consumer healthcare company with strong fundamentals and growth prospects. The company has relatively high margins compared with its peers operating within the same business. Based on firm financial performance we have given BUY recommendation with single-digit upside potential (based in NTM EV/EBITDA of 12.5x on FY19E EBITDA) or (based on NTM PE of 16.06x on FY19E EPS) respectively.

*The buy recommendation is valid for the current price as covered in the report as on (6th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

Disclaimer
 
PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser. Our publications are NOT a solicitation or recommendation to buy, sell or hold.