Tags

, , ,

Got this idea from Mello stock slam.  I quite like it, bought a just under 3% weight at 42.9 earlier in the week.

This is a Bangladeshi Generic Pharma GDR listed on AIM.  There is a substantial discount to the listed Bangladeshi co which is trading at the UK equivalent of 74p – a c40% discount to the Bangladeshi company.

There have been lots of fly-by night overseas domiciled companies on AIM.  I don’t think this is one of them.  Firstly the sector is pharma – highly sensitive and regulated – not the ideal place to operate a scam.  Secondly, the company was founded in 1974 – so it has been going quite a while.  This is one of the biggest / most liquid companies in Bangladesh.

There is a decent dividend yield here – c4-5% probably, based on my very rough estimates.  Earnings for Q1 were significantly up YoY.  I see several quarters of rising revenue being followed by rising earnings, at a low PE – at least on the UK listed stock it is at a likely forward PE of 5/6.  This is based on them doing in Q2-4 what they did in Q1 with no more growth in earnings.  There is a law in Bangladesh mandating that they pay out 30% earnings in dividend. I believe it varies year to year.  I actually believe this is a very good thing – though others would debate it.  A regular dividend is a good indication that the company is real / not fraudulent, though I acknowledge it is slightly sub-optimal financially. There is some debt here but a good book value.

The stocks are not fungible with the Bangladeshi stocks – apparently due to capital controls.  I find this hard to believe as by converting an AIM GDR to Bangladesh you are effectively bringing money in, not out, though unless you want to keep your money in Bangladesh you need to get it out somehow. I haven’t made any headway in progressing this – and to be honest, will keep it quiet if I do.  I have also heard the Bangladesh authorities need to do something but that they have been unable to, do due to political chaos. The shares are entirely equivalent to the Bangladeshi shares they are just a lot cheaper – its quite a positive thing that locals who know/understand a company price a share more highly than foreigners, who likely don’t know it quite as well.

My concerns are that there are some large related party transactions.  You just have to trust them on this – they are big but not excessive.  I am also concerned that they don’t have a big 4 auditor but a check of their auditor turned up nothing suspicious.

There is a possibility for a buyback / other corporate action the company are having to pay quite a lot of money to maintain the GDR listing.  If we assume it hasn’t changed from what it was in 2010 then this is about $1.8m – this is lot for a GDR worth £38m.  It’s actually worse than that as with the GDR trading so cheaply money can’t really be raised using it.  I suspect either the fungibility issue will be fixed eventually or there will be some other transaction to resolve this.

Bangladeshi politics are the main impediment to this – it seems to me to be a sort of benevolent dictatorship.  I suspect as the dictatorship consolidates this will stabilize, business as usual will resume and money will flow.  The current account is a little negative but not excessively and GDP grew 8% in 2018. This is likely to positively affect demand.

These have been covered by others – there is a write up here. Also a good one by Alpha Vulture here and here. Chap I saw at Mello was worried about debt / cashflow with the somewhat forced dividend.  I am not overly concerned given their recent strong results.

To me the catalyst is that earnings estimates look wrong. In addition revenue growth now seems to be feeding through to earnings – I believe this may be an inflection point as the share rerates. Another local generic company Beacon Pharma – similar – but probably more innovative is on a 50 PE – vs Beximco in the 10s-13s depending on where you think earnings are but Beacon is far more volatile.

As ever, comments / thoughts are appreciated.