“Extranormal” : Rencap Explains Why GSK Nigeria Is A Strong Buy

On 25 January 2016, GlaxoSmithKline Consumer Nigeria Plc (GSK Nigeria) received a non-binding offer from Suntory Beverages & Foods Ltd (Suntory) to acquire GSK Nigeria’s drinks business. Although we are cautious on Nigeria – the consumer environment remains challenging as disposable income dwindles and operating costs escalate – we believe the deal could benefit shareholders directly with a potential ~40% extranormal 2016E dividend yield, on our estimates. As a result, and given the difficulty of accessing FX for portfolio flows, we believe GSK Nigeria is the best way to play the current situation. We upgrade our rating to BUY (from Hold) and maintain our NGN40 TP.

Nigeria is still tough…

We recently met with various management teams of consumer companies in Nigeria. Our key takeaway is that nothing has improved. The hope that better security in the North would lead to the region being tapped into has not played out. Consumers remain extremely price sensitive and access to FX remains an issue. One operator told us it applied for FX in October 2015, but was allocated less than 5% of its requested amount in January 2016. Cost inflation for the operators continues to escalate and pricing power has become limited. GSK Nigeria noted that it attempted to raise the price of a Ribena SKU from NGN50 to NGN55 in November 2015, but had to reverse the price rise when volumes dropped dramatically.

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…but if you are stuck in Nigeria, play GSK Nigeria

Although we remain cautious on the Nigerian consumer sector, we are cognisant that it has become increasingly difficult to get money out of the country. On 25 January 2016, GSK Nigeria announced that it had received a non-binding offer from Suntory to acquire GSK Nigeria’s drinks business, which bottles and distributes the Ribena and Lucozade brands. The financial terms of this transaction remain confidential; however, GSK Nigeria disclosed that Suntory has commenced its due diligence review.

Possible 40% extranormal dividend yield? 

Currently Ribena and Lucozade contribute ~55% to GSK Nigeria’s revenue. The remaining 45% is split between the pharmaceutical and consumer healthcare portfolio. This transaction will be carried out at the subsidiary company level, thus GSK Nigeria and shareholders will benefit directly. We believe it is likely that a good portion of the proceeds from the sale of the drinks business will be distributed as an extraordinary dividend. On our estimates, this implies a spike in the 2016E dividend yield to ~40%. As a result, and given the recent pullback in share price, we upgrade GSK Nigeria to BUY from Hold. We maintain our NGN40 TP.