Thursday, 5 February 2015

GlaxoSmithKline finals



GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 




Glaxo released their final results yesterday declaring that turnover was down 13.2% at £23bn, but excluding disposals and at constant currency down 3%.  This is similar to the situation at the 9 month stage where turnover was down 14% and 3% excluding disposals and at constant currency.

Seretide/Advair, that represent 18% of GSK's sales, continue to decline down 18% in the quarter and 15% for the year.  In total respiratory drugs, that represent almost 27% of GSK's sales, declined by 10% in the year; management expect a return to growth for this segment in 2016. 

Core operating profit (excluding divestments) at CER was down 6% at £6.6bn, reported operating profit was £3.6bn a decline of 49%. Core EPS at CER was down 1% at 95.4p and reported EPS was 56.7p a decline of 48.7%, although on a continuing business basis down 47.7%.

A final dividend of 23p was declared making 80p for the year an increase of 2.6%, only covered 0.71x by earnings.  As stated at the third quarter results and confirmed in the statement, the 2015 dividend will be frozen at the 2014 level and there will be no share buy-backs.

Free cash flow (FCF) was disappointing at £3.2bn compared to £5.0bn last year and did not cover dividend payments of £3.8bn and share repurchases of £0.2bn.  Net debt increased by £1.8bn to £14.4bn, as there were further calls on cash flows for the increased holding in the Indian pharmaceutical subsidiary from 50.7% to 75%, the acquisition of the remaining 30% of GSK's Indonesian Consumer Healthcare business - a total of £0.7bn and £0.2bn for dividends to shareholders in non-controlled businesses.


Net debt ratios look unhealthy with gearing at 337%, debt to EBITDA at 2.6x and operating cash flow just 22% of debt.  This situation will be improved following the Novartis deal, as GSK will receive a net $10.75bn ($1.5bn conditional on the COMBI-d trial), equivalent to £7.2bn and pay-out to shareholders £4bn.  GSK is also selling its 7.9% stake in Danish biotechnology company Genmab A/S via a share placing to raise ~£0.2bn.

Fortunately GSK has a low weighted average cost of capital (5.6%) and even at these lower relative profit levels, they return a 19% ROCE and FCF over a three year period returns 19.5% on their average capital employed.

The return of capital commented on here will return approximately 82p per share and come with a share consolidation.  As I mentioned in my comment of the Melrose ROC scheme here the 2014 Autumn statement proposed that from 6 April 2015, special purpose share schemes will no longer be able to offer capital and income options - they will all be deemed to be income (taxed in the same way as dividends.  This will cause two problems in the future i) higher income tax shareholders will no longer be able to shield ROC as a capital gain, thereby using CGT allowances; ii) investors that shield their investment in an ISA and have their dividends distributed to them, will be at risk of having the ROC paid to them by their broker, in effect distributing capital from their ISA.  So if GSK's scheme is after April 5, it will be classed as a dividend and therefore income. 

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