Beximco Pharma - the case of the undervalued pharmaceutical company

Monday, 29th September 2014 09:41 - by Moosh

I have been a long term shareholder in Beximco Pharma (TIDM: BXP), the AIM-listed manufacturer of generic pharmaceuticals in Bangladesh, which is also listed on the Dhaka and Chittagong stock exchanges.

¹ Having spent nearly a decade of my life as a pharmacist (though now retired!), I would like to believe that my days bouncing about in dispensaries across the country have given me a better grounding than most with respect to anything pharmaceutical. I understand generic drugs, their uses, the conditions they are used for, how often these items are used, and how much they cost to buy from the manufacturers, so it’s easy and useful for me to scroll down the list of products that BXP produce and in my head I can get an immediate idea of the potential of what the company has to offer. There isn’t a case of anyone having to ‘sell’ me this as an investment. The only thing I need to feel comfortable about is how the company financials stand up.^2-6 The following table presents simple financial information from the last 5 years of full year results:

Table 1: Basic financial results information from the last 5 years for BXP

Here is a company which has been profitable for a number of years but the price has been, for many of those years, in a long term downtrend. This is the kind of company I like! The company has been issuing stock dividends year after year, but in a downtrend, investors have tended to sell these stock dividends as soon as they have received them, which inevitably exacerbated the downtrend. Arguably, forcing the price down in this way just made it a better bargain since it allowed the share to become more undervalued according to PE ratio. It may appear that the earnings have been dropping year on year, but don’t forget that year on year there has been dilution of the total number of shares due to the stock dividend issue, so in some cases, after restating comparable year’s eps values, there has been growth.

However this year, the game has changed somewhat since BXP has begun to issue both a stock and cash dividend. With the company giving a cash dividend now too, it gives investors a reason to hold any stock dividends so that these can benefit from future cash dividends, assuming BXP continue to offer a cash dividend. What is good to see is that the dividend cover is ~4, that is, the cash dividend is well covered by the earnings (where industry standard for dividend cover is assumed to be ~2).

The question is, will the tide ever turn for the BXP share price in the UK? It does seem like the tide is already beginning to turn since the introduction of the cash dividend appears to have helped in reversing the downtrend and the price has risen from 12.125p to as much as 20.375p over the last few weeks. Investors are obviously now seeing the bargain opportunity presented by BXP, especially since the latest eps of 4.01 Taka (~3p) suggests fair value to begin at 30p, stretching to a maximum price of 60p (at PE ratio 20). The BXP price in Dhaka has been around 68 Taka recently, which would be a PE ratio of 17, therefore towards the top end of fair value, so it may well be that the market in the UK is on its way to catching up with the equivalent price in Dhaka. This year has so far seen a 10% rise in eps (to H2 2014) and BXP has recently received Good Manufacturing Practice approval from the Taiwan Food and Drug Administration regulatory agency, which should also boost future earnings once exports begin to the area, which I expect to be a massive market for generic drugs.^7-8 BXP already exports to many countries across the world and are also continuing to bring out new lines in their portfolio of products so there is obvious room for market expansion and penetration. It will be interesting to see what unfolds in the future for BXP!

References:

1. http://www.beximco-pharma.com/
2. https://www.share.com/find-investments/advanced-finder/company-overview/beximco-pharmaceuticals/news/8516/?pass=1&story_id=3426483&rns=1
3. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=BXP&ArticleCode=kel11c2u&ArticleHeadline=Price_Sensitive_Information
4. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=BXP&ArticleCode=2h5pt9so&ArticleHeadline=Notification_of_preliminary_results_and_AGM
5. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=BXP&ArticleCode=eztr3tqx&ArticleHeadline=Notification_of_Preliminary_Results_and_AGM
6. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=BXP&ArticleCode=1d0e3jlz&ArticleHeadline=Notification_of_Preliminary_Results_and_AGM
7. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=BXP&ArticleCode=p4883svu&ArticleHeadline=Receives_GMP_Approval_from_Taiwan_FDA
8. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=BXP&ArticleCode=ux2xugos&ArticleHeadline=Half_Yearly_Report