Beximco Pharma: London GDR trading at 60% discount

I’m a big fan of simple investment thesis’s. If you can’t write one down on a napkin it probably depends on too many assumptions which makes it likely that one or more of them are wrong, invalidating the thesis. Another possibility is that you don’t fully understand the thesis which makes it hard to drill down to the essence of the idea. As you might have guessed by now, the investment case for Beximco Pharma is simple: you really don’t need to read more than the title of this post to understand it. It’s really that simple!

It’s interesting enough to spend some more words on it though. Beximco Pharma is located in Bangladesh, and the company describes itself as follows:

Beximco Pharmaceuticals Ltd (BPL) is a leading manufacturer of pharmaceutical formulations and Active Pharmaceutical Ingredients (APIs) in Bangladesh. The company is one of the largest exporter of pharmaceuticals in the country and its state-of-the-art manufacturing facilities are certified by global regulatory bodies of Australia, European Union, Gulf nations, Brazil, among others. The company is consistently building upon its portfolio and currently producing more than 500 products in different dosage forms covering broader therapeutic categories which include antibiotics, antihypertensives, antidiabetics, antiretrovirals, anti asthma inhalers etc, among many others.

While the company talks about exporting drugs to numerous countries around the world it’s not a big part of their business. Exports account for just 6% of revenue. To complete the first impression some quick statistics based on the latest price in Dhaka:

Last price (Aug 15, 2014): Tk43.00
Shares outstanding: 367,851,652
Market Cap: Tk15.82 billion (US$204.18 million)
P/B (mrq): 0.79x
P/E (ttm): 10.76x
EV/EBIT (ttm): 7.28x

While I had never heard of the company before reading about it in the latest Krohne Capital monthly report they are apparently pretty big in the local market. They are part of the DS30 index and it appears that Beximco AGM’s are quite the event. The company writes in the 2007 annual report that around 7,000 shareholders attended the meeting that year. Don’t know if this is common in Bangladesh, but in the developed world Berkshire Hathaway is probably the only company that has higher attendance numbers at AGM’s. Some pictures:

Beximco 2007 AGMThe London GDR’s

Beximco doesn’t look particularly cheap or expensive when we look at the pricing metrics above, but as promised in the title we can buy the company at a 60% discount through GDR’s that are traded in London. Beximco has been listed on the Dhaka stock exchange since 1985 and the company obtained a listing in London in 2005 as the first and only Bangladeshi company. Approximately 22% of the outstanding shares are traded in London while the remainder is traded in Bangladesh. One GDR equals one ordinary share.

While a small discount might be appropriate because trading liquidity in London is lower there is really no good reason for the current pricing discrepancy. The discount probably only exists because there is no arbitrage possible. In addition to this presumably few people in Bangladesh have access to the AIM market in London, while at the same time few people with access to the AIM market care about investing in Bangladesh.

If you buy the stock in London the company suddenly appears dirt cheap:

Last price (Aug 15, 2014): GBX13.25
Shares outstanding: 367,851,652
Market Cap: £48.74 million  (US$81.23 million)
P/B (mrq): 0.31x
P/E (ttm): 4.28x
EV/EBIT (ttm): 3.15x

Financials

Knowing that the GDR is trading at a 60% discount is enough to know that Beximco is a bargain, but it is nice to know what we are exactly buying. I have compiled an overview of the historical financials in the table below:

Historical financials Beximco Pharmaceuticals

What is important to realize when looking at these numbers is the fact that inflation has averaged around 8 percent the past ten years in Bangladesh. This makes their growth in revenues and earnings a lot less impressive. What is a bit worrying is that the company has heavily invested in growing the business in the past decade – cumulative free cash flow is negative for the past 10 years – but it is failing to generate attractive returns on equity. So not really a business that you want to reinvest in. Because of this I think that the company is currently reasonable valued – perhaps a bit expensive – on the Dhaka stock exchange at a 0.8x P/B ratio and a 10.8x PE-ratio.

Insiders

Beximco Pharma is owned for 5.6% by Beximco Holdings: the largest conglomerate in Bangladesh. The vice chairman of both Beximco Holdings and Beximco Pharma is Salman F Rahman whose net worth is estimated at around US$ 2 billion. He personally owns another 2% of Beximco Pharma while the chairman of the board (his brother?) also owns 2%. I think this is a healthy amount of insider ownership, although it is obviously just a small piece of his total net worth. Interesting tidbit: apparently Salman F Rahman is currently serving as a director of the Bangladesh Securities and Exchange Commision. Not sure if that is a positive or not…

As is visible in table above: the company has an irregular history of paying cash dividends. They reinstated the cash dividend this year after a four year suspension. If they would continue paying their current dividend – which should be totally possible since it represents a 25% payout ratio – the company would have a 5.7% dividend yield. That’s pretty decent!

What is annoying is that the company is also paying a stock dividend. This is a totally useless idea since a stock dividend is equivalent to a stock split and as a shareholder you own exactly the same economic interest in the company before the dividend as after the dividend. It only makes comparing historical financials harder. I have tried to restate all the per share information in the historical financials to account for the stock dividends.

Conclusion

Beximco Pharma isn’t a great business, but it isn’t too bad and it is an absolute bargain when you buy it in London. The AIM market is crappy with regards to liquidity and the execution of trades, but I don’t think that warrants a 60% discount. It’s hard to get a thesis that is simpler than this!

Disclosure

Author is long BXP.L

32 thoughts on “Beximco Pharma: London GDR trading at 60% discount

  1. james

    I’m not sure I understand your thesis. What are you getting for your investment?
    1) A business with bad economics, bad management and very little growth: “What is important to realize when looking at these numbers is the fact that inflation has averaged around 8 percent the past ten years in Bangladesh. This makes their growth in revenues and earnings a lot less impressive. What is a bit worrying is that the company has heavily invested in growing the business in the past decade – cumulative free cash flow is negative for the past 10 years – but it is failing to generate attractive returns on equity. So not really a business that you want to reinvest in.”
    2) An undervalued asset?
    3) A possible catalyst?

    Reply
    1. Alpha Vulture Post author

      The business isn’t great, but also not that bad. Operating profit has grown at a 15% rate the past decade which is pretty decent, even after 8% inflation. Buying this at a 4.3x P/E ratio is pretty sweet imo.

      Reply
  2. Wildbill

    Do you believe that there is any specific catalyst that will close this 60% discount in the future? Couldn’t this gdr be trading at the same discount 3 years from now?

    Reply
    1. Alpha Vulture Post author

      Sure, it is totally possible but you don’t need a catalyst to generate good returns since you receive the full value of future dividends. And I would argue that it if the current discount isn’t rational you should have a little bit of faith in the efficiency of the markets.

      Hypothetically: if you would be able to buy a random company from the S&P 500 at a 60% discount in Bangladesh: would you take that deal? I know I would! This is just the reverse situation: you get the opportunity to buy a random DS30 stock at a 60% discount.

      Reply
  3. Dan67Bird

    I really like this idea and can’t believe the gap is so big. I’d love to buy in but my investment accounts are Roth IRAs and a Traditional IRA with Fidelity and they’re pretty limited as far as international markets. I’ll have to talk with customer service. I also wonder if different brokers would give me more international freedom with my IRAs, I’ll have to check into this.

    thanks

    Reply
  4. ERIC

    theoretically this is a great trade. there is a big reason for the discount that will create a continual hang on the stock that I think you may have missed though (and same w/ the khrone guy), it is a REG S security. you can’t buy it (legally) unless you are a qualified institutional buyer (QIB), which means 100m or above. or you need to be foreign. see the notice http://www.adrbnymellon.com/files/QB23326.pdf

    Reply
    1. Alpha Vulture Post author

      I don’t think it is really important that retail US investors are unable to buy this security. US investors would have a hard time buying stock on the AIM market in London anyways. Besides that point: US investors are also unable to buy the stock on the local market in Bangladesh, so if it would be a reason for a discount it would also apply to the local market listing and shouldn’t be a reason for a discount between the local market listing and the London listing.

      Reply
      1. Eric

        I disagree, respectfully of course. I can trade in Bangladesh, even though it is a lengthy process, whereas I cannot avoid QIB rules. I wouldn’t be so dismissive, I have a strong feeling this is the “cheap for a reason” element.

        Reply
        1. Alpha Vulture Post author

          Sorry, but what you are saying doesn’t make a lot of sense to me. There are thousand of securities world wide that retail US investors don’t own. Either because they aren’t interested or because they are unable to own it. It’s a fair bet that the majority of those securities are reasonably valued. You don’t need every group to participate in the market to get an efficient price.

          What you are basically saying is that for foreign stocks US retail investors are the marginal buyers. How likely is that?

          Reply
  5. TEs

    Well I am able to find this stock on my Fidelity Account. Haven’t tried buying it yet – I’m US based…is it ILLEGAL to buy it if I’m not a qualified buyer?

    Reply
    1. Alpha Vulture Post author

      IANAL, but if you are indeed able to buy it I wouldn’t worry too much about whether or not it is ‘illegal’. Probably your broker that will be breaking the rules in that case by letting you buy it.

      Reply
  6. itwillfluctuate

    What a simple and great idea! Too bad I can’t buy on the AIM.
    Alpha, you have an outstanding blog.

    Reply
  7. NeverLoseMoney

    Thanks for the idea, I like it!

    Unless results deteriorate, it’s just tough to see this getting much cheaper isn’t it? You’re buying a company at 0.3x BV and 4x earnings. Tough to find that, even in Japan. If the company can keep up its historical growth rate, the valuation is just going to look more and more ridiculous as time passes. So, unlike Eric, I’m not too worried about a perpetual discount, at least not of this size. Eventually more investors will become interested and the discount will narrow in my opinion.

    Are they allowed to repurchase or do a tender for some of the GDR’s? Seems like a pretty good time to do so.

    Reply
  8. rrrickroll

    Is it possible to buy the GDR shares and convert them into bangladesh shares, and then sell them on the Bangladesh exchange? If this is possible in theory it would be a great arbitrage?

    Reply
  9. Gmoney237

    Has anyone seen the recent price movement in Dhaka for Beximco Pharma? (BXP) It has jumped in the last few days and now trades at 57 bdt which is up from the 43 BDT at the beginning of this blog.

    The price in London has only just reacted today moving up to 14.5p so now it is trading at an even bigger discount to the Dhaka price. I believe the news below has something to do with the price in Dhaka moving upwards…..

    GLA

    http://www.thefinancialexpress-bd.com/2014/08/19/51134
    July Pharma Exports surge 31%

    Reply
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  11. Martin

    Interesting company. I am looking into it now.

    –I would book the “Contribution To WPPF & Welfare Funds” under taxes, as it is 5% of PBT:
    “31. Contribution To WPPF & Welfare Funds
    This represents statutory contribution by the company as per Bangladesh
    Labour (amendment) Act 2013. The amount is computed @ 5% of net profi t
    before tax (but after charging such contribution).”

    –The project Loan is carrying interest at 13.00% to 15.50% per annum, is repayable in quarterly installments ending by 2017. It is secured with mortgage charge on 1,113 decimals of land at Kathaldia, Aushpara, Tongi of Gazipur along with the building and other constructions thereon and First paripassu charge by way of hypothecation on all assets of the company both present and future.
    Why pay a dividend with the low ROIC and high Cost of Debt? The equity has to return more than this, but it does not.

    –Short term investments are invested into the parent company Beximco. Just look at portugal telecom… Again it would make more sense to repay loan.
    “This represents the Company’s temporary investment with Bangladesh Export Import Company Limited (Beximco Ltd.), carrying interest 1% above bank interest rate. This investment is returnable as and when required by the Company.”

    –Many advances and prepaid expenses: Is this some tunelling?

    Still the price is low enough to buy.

    Reply
  12. Alpha Vulture Post author

    * Agreed, it is effectively a tax.
    * I think this is somewhat common with emerging market stocks. Paying a dividend reduces corporate governance risk which is important when laws and regulations are weaker.
    * Yes, also not optimal.

    While the stock/company isn’t perfect these are all not reasons for a discount between the London price and Dhaka price. As long as the stock is somewhat reasonably priced in Dhaka buying it at a 60%+ discount in London is a great deal imo.

    Reply
  13. Rabi

    So, after the November 15, 2015 news the price jumped in both the exchange and it is tremendous considering the last few years’ price change of that stock.

    Reply

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