SIF Folio: Beximco Pharmaceuticals - a buying opportunity?

It’s been seven weeks since I added a stock to the SIF folio. In that time, all I seem to have done is sell shares. After last week’s disposal of Wynnstay, SIF is now 38% in cash and has just 12 holdings.

This lack of buying is not due to any market-timing efforts on my part. What’s happened is that my buying screen has been unable to find suitable stocks to add to the portfolio. For many weeks, the screen has returned only a few stocks. Usually, they’ve been existing holdings or otherwise unsuitable..

This remains true. My screen is returning just four results at the time of writing. However, one of these is a company that appears to tick all the boxes and would give SIF some useful exposure to the healthcare market.

Beximco Pharmaceuticals: an unusual UK share

Beximco Pharmaceuticals (LON:BXP) is a Bangladeshi company which makes generic medicines and active pharmaceutical ingredients. It was founded in 1976 as an importer and distributor of medicines from western pharma firms. The group has since become a manufacturer in its own right and now exports widely, including to western markets. Beximco is listed on the Dhaka Stock Exchange but has had a dual listing in London since 2005. 

This is not the first time I’ve looked at this business on these pages. I held Beximco in SIF in 2016/17, exiting the position in May 2017 with a 70% gain.

I’ve kept an eye on this business since then and have been impressed by its continued growth and stable profitability. According to Stockopedia data, sales and profits have both grown by a compound average of 18% per year since 2015. Operating margins have averaged 22% over this period.

With a UK market cap of £364m, Beximco isn’t particularly large. But one reason for this is the shares’ unusual dual listing structure and dual valuation. 

The company’s primary listing is on the Dhaka Stock Exchange, in Bangladesh. Beximco’s market cap on its home exchange is a rather racier £725m. How can this be?

This situation has arisen because Beximco’s UK-listed GDRs (Global Depositary Receipt) and its Dhaka-listed shares are not fungible. What this means is that you cannot exchange a GDR for the underlying share. 

This is somewhat unusual, but I don’t think there’s anything sinister about it. In some ways, I think it’s reassuring that investors in the company’s home market are willing to assign a more typical valuation of 24 times forecast earnings, while we’re able to buy them on a P/E of 12.

Should I add Beximco to SIF? The shares pass all of my screening tests, which is a good starting point. Stockopedia’s algorithms also seem to be impressed, awarding a StockRank of 84 and a Contrarian style to the stock.

The omens are good, but I’ll take a look at Beximco’s QVM factor scores before making a decision.

Value: No complaints

Beximco’s ValueRank of 73 does not suggest any serious concerns. Looking more closely, the valuation seems affordable to me for a business with 20%+ operating margins:

The TTM valuation snapshot on the StockReport provides a one-stop look at a stock’s valuation, but the ValueRank also uses some other metrics which I find useful:

• Trailing P/E ratio: 12

• Earnings yield (EBIT/EV): 12%

• Dividend yield: 1.6%

These numbers all look reasonable to me. I think this stock could be attractively valued. 

One slight negative, in my view, is the company’s semi-regular habit of paying stock dividends in addition to cash dividends. For example, last year, Beximco paid a stock dividend of 10 shares for every 100 shares held in addition to the cash dividend I’ve listed above. 

The advantage of this choice was that it allowed for a larger proportion of free cash flow to be used to reduce net debt:

The disadvantage of stock dividends on this scale is that they dilute future earnings per share growth. I wonder if this might limit the potential of the shares to re-rate.

After the reduction seen over the last 18 months, Beximco’s debt levels appear manageable to me:

• TTM net debt: BDT 8,543m - equivalent to 2.1 times trailing net profits

Quality: Improving?

Beximco’s QualityRank of 97 suggests that this is a profitable, cash-generative business. I think that’s true, at least based on recent performance:

However, the company does seem to have been investing heavily in recent years. Free cash flow was negative in 2015, 2017, 2018 and 2019. This was due to capital expenditure exceeding operating cash flow. 

This isn’t necessarily a red flag for me, unless it’s accompanied by excessive debt or worsening performance. In this case, the extra investment appears to have led to renewed growth. As I mentioned earlier, net debt has also fallen to a more comfortable level over the last couple of years. 

I hope that these numbers tell us that Beximco’s management is successfully investing for the future. But I should stress that in keeping with the quantitative nature of the SIF strategy, I haven’t researched all these cash flow movements in detail.

However, my view that Beximco’s fundamental performance is improving does appear to be supported by its impressive Piotroski F-Score - a perfect 9/9:

The Piotroski F-Score is heavily-weighted in the QualityRank. It’s said to be an especially useful predictive indicator for small caps. A score of 9/9 shows improving fundamental performance - click through to see a full breakdown of the measures used.

Overall, I feel comfortable with Beximco’s quality metrics. 

Momentum: opportunity?

Beximco’s MomentumRank of 40 is by far its lowest factor score. The red down arrow next to the rank also tells us that this score has fallen over the last 30 days:

Turning to the chart, we can see that Beximco’s share price has performed strongly over the last 12 months but has weakened recently:

Fortunately, I don’t think the situation is quite as bad as this slump might suggest.

Earnings estimates: I’ve checked the RNS feed for the latest news from the company and found two items that seem relevant to recent price action:

Update on supply of Covid-19 vaccine (28/4): Beximco has a contract to import 30m Covid-19 vaccine doses from India to Bangladesh. This was expected to make “a material positive difference” to profits for the year to 30 June 2021. 

However, vaccine exports from India are currently suspended. This means that the completion of this contract will be delayed. Profit for the final quarter of the current year is now likely to be lower than previously expected, although we’re not told the expected impact. 

Q3 results (30/4): these nine-month numbers show sales up by14% to BDT 21,762m for the nine months to 31 March. After-tax profit for the period rose by 40.8% to BDT 3,695m. 

At this level, after-tax profit is already higher than that reported for the 12 months previously. Managing Director Nazmul Hassan says the company is still confident of “a strong result for the full year”. To me, this suggests the final quarter should be profitable despite the vaccine delays. 

I’d estimate full-year after-tax profit of at least BDT 4,000m. My sums suggest this would put the stock on around 11 times 2021 forecast earnings.

Price Momentum (technical): The sell-off seen since January has weakened some measure of price momentum. But the one-year relative strength metric I use in my screening remains high, showing the stock has outperformed the market over the last year. We can also see that volumes have increased over the last 10 days - a bullish sign:

Beximco isn’t the most liquid stock on the market. Broker coverage is not very good either. As a result, I think shareholders can expect some volatility from time-to-time. Such moves can also

provide buying opportunities. I think this may be one of them, given the company’s strong performance for the nine months to 31 March.

My decision

Beximco Pharmaceuticals’ strange dual listing structure and valuation disconnect make it an oddity. But the company has been listed on the London market for more than 15 years and developed a solid reputation. 

Unlike with Alumasc recently, I don’t see any reason to override my screen results here. I’ll be adding Beximco Pharmaceuticals to SIF and to my personal holdings this week, after this article has been published.

As always, I’d welcome your views. What do you think of this unusual stock? Is the valuation as attractive as it appears to me?