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:
The 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$81.23 million)
P/B (mrq): 0.31x
P/E (ttm): 4.28x
EV/EBIT (ttm): 3.15x
Financials
Knowing that the GDR is trading at a 60% discount is enough to know that Beximco is a bargain, but it is nice to know what we are exactly buying. I have compiled an overview of the historical financials in the table below:
What is important to realize when looking at these numbers is the fact that inflation has averaged around 8 percent the past ten years in Bangladesh. This makes their growth in revenues and earnings a lot less impressive. What is a bit worrying is that the company has heavily invested in growing the business in the past decade – cumulative free cash flow is negative for the past 10 years – but it is failing to generate attractive returns on equity. So not really a business that you want to reinvest in. Because of this I think that the company is currently reasonable valued – perhaps a bit expensive – on the Dhaka stock exchange at a 0.8x P/B ratio and a 10.8x PE-ratio.
Insiders
Beximco Pharma is owned for 5.6% by Beximco Holdings: the largest conglomerate in Bangladesh. The vice chairman of both Beximco Holdings and Beximco Pharma is Salman F Rahman whose net worth is estimated at around US$ 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
