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Bangladesh: Minimal impact on economy despite new wave of Covid

  • Fresh lockdown schedule from the government to curb rising infection; however, more economy-friendly approach this time
  • 2nd wave of Covid less likely to restrain Bangladesh growth; liquidity & stock market valuation at a comfortable level
  • We prefer 12 stocks considering local demands, growth potential during the pandemic and rebound of economic activities
Bangladesh: Minimal impact on economy despite new wave of Covid

Fresh lockdown schedule from the government to curb rising infection; however, a more economy-friendly approach this time

Bangladesh is currently undergoing a countrywide lockdown to curb the increasing number of daily COVID-19 cases which peaked at 7,626 on April 7, 2021. The 7-day moving average of infection rate (i.e. new positive cases identified per 100 tests performed) increased from c3% in Feb 2021 to 20%+ in Apr 2021. As a result of this infection hike, the government had to impose a fresh lockdown throughout the country. The first phase of lockdown was in place from April 5, 2021 to April 11, 2021 which has been extended till April 28 2021.  However, factories, construction activities, financial institutions, stock market and emergency services are allowed to operate during this lockdown, unlike last year’s general holidays.

Second wave of Covid-19 is less likely to restrain Bangladesh growth   

The ongoing lockdown has slightly slowed down the free movement of the population, without putting any significant pressure on economic activities. During this 2021 lockdown, all factories are open and construction activities are running at full pace. Even people's mobility is higher than the previous lockdown. According to Google’s COVID-19 Community Mobility Report (March 2, 2021), Bangladesh is the only country to have generated positive growth in mobility trends in all six areas - workplace (10%), public transport (24%), supermarket & pharmacy (41%), recreational facilities (13%), parks (12%) and residences (5%) respectively from the baseline. This April-2021 lockdown has restricted the movement to some extent but it is better than the previous year's (April-2020) situation. (Graph in Appendix – page 21). In the first phase of 9 days lockdown, we have seen gradual relaxation of most of the restrictions. We may see further relaxation as different associations are already demanding more flexibility. Moreover, supply chain management is better in 2021 than it was in 2020. All work of the mega infrastructure projects are in full swing. We have observed that small-scale private construction activities are also running at full phase. Besides, all factories including RMGs are open. To ensure an uninterrupted supply chain, all transports related to goods supply have been exempted from lockdown restrictions. Overall, we don’t expect the 2021 lockdown to have a significant impact on the way to growth recovery.

High liquidity to continue amid policy relaxation

Following the central bank’s expansionary monetary measures, the excess liquidity of the scheduled banks amounted to BDT2.04tn (USD24bn) on Jan 21 vs BDT 1.05 Tn (USD 12.4bn) on Dec 19. Please note that the policy relaxation and expansionary monetary measures were undertaken to address the adverse impact of the first wave of COVID-19 on the economy. Owing to the recent surge in COVID-19 infection rate (refer to Chart 1, page 4), we expect that the central bank may continue with its relaxed, expansionary policy measure and as such, the liquidity squeeze is less likely. Thus, the low-interest rate regime is likely to continue in recent times.

Source: Bangladesh Bank (BB), IDLCSL Research

Market trading below its median PE multiple

The prime index of Dhaka Stock Exchange (DSE) is c10% down from its peak of 5,909 points. At the recent peak (mid-January 2021) market trailing P/E was 15.2x. The market is currently trading at 14.0xP/E*. It is lower than the median level of 15.1x during the 2006-2020 period.

*We have excluded outliers companies – companies with negative earnings and PE over 80. If we did not exclude outlier companies then market PE would have stood at 17.5x.

We prefer selected stocks as some will do better than the others

In 2020, we have seen all companies were not equally impacted during the lockdown. We expect a similar situation this year as well. We have considered local demands, growth potential during the pandemic and rebound of economic activities to select our preferred stocks. We prefer BRAC from financials, GRAM & BSCC from telecom, SQUARE, RENATA & IBNSINA from pharma, OLYMPIC, MARICO & SINGER from consumers, BERGER & LINDE from constructions and SUMMIT from energy.

Risks

  1. Continuation of strict lockdown for a prolonged period;

  2. Change in low-interest-rate regime

  3. Inconsistent policy change

  4. Global lockdown driven export and remittance dip.

Table 1: Top picks for 2021

Source: IDLCSL Research

Update on Sectors

Economy

  • Bangladesh government expects 7.4% GDP growth in FY21 despite pandemic challenges.  

  • Different multilateral agencies also expect high growth. ADB forecast suggests 6.8% and IMF expects 5.0% for FY21.

  • Mega infrastructure project works are going at full swing. Country’s economic activities to get an uplift after the completion of these megaprojects.  

  • Higher remittance flow (+34% in 8 months), export  (-1.5% in 8 months) and import (+1.9%) recovery portrays a sunny day ahead.

 Banking Sector – BRAC (ETR 62%)

  • We are cautious on the banking sector except for BRAC. Our cautious stance is based on the deteriorating asset quality. We are yet to see the impact of the pandemic on the banks' asset quality due to Bangladesh Bank’s relaxation. Besides, Bangladesh Bank may extend its relaxation period due to the second wave of Corona.

  • We are positive on BRAC because of its MFS subsidiary bKash. We believe MFS will reap maximum benefits from this pandemic.

  • At the current market cap of USD 652mn, BRAC is trading at only 0.46x of its banking business NAV if we adjust for our bKash valuation of USD 942mn.

 Telcom Sector – GRAM (ETR +35%), BSCCL (ETR +33%)

  • Purchase of 10.4 MHz spectrum (0.4 MHz of 1800 band, 10 MHz of 2100 band) to improve GRAM’s network quality. Revenue struggles amid price competition. Better benefit to be reaped when data price competition stabilizes. High dividend yield (c8% based on 2021f dividend), cheap valuation (12.4x 2021f PE, 4.9x 2021f EV/EBITDA and 3.1x 2021f EV/Sales) makes GRAM attractive even if we adjust for the payment of contingent liability claim.

  • BSCC to capitalize on bandwidth monopoly amid increasing digital adoption. Average bandwidth consumption posted 100% YTD growth in Aug 2020 amid pandemic-driven digital engagement. Bandwidth usage is expected to increase further in Q4 FY21 as the government already imposed lockdown in several phases to restrain an increasing number of infections and death. We believe the digital adoption to sustain and BSCCL to capitalize on it due to its bandwidth monopoly with c68% market share. We anticipate that bandwidth usage will cross the 2,300 Gbps mark (vs 2,100 Gbps in Aug 2020) by June 2021.

  • We change our TP for BSCC from BDT197.2 to BDT213.0 (+8% revision), ETR +33% for Jun 2022. This change comes from the upward revision of EPS expectations. We revise our expectation of 2021f EPS from BDT9.37 (NPAT: BDT1,545mn) to BDT10.02 (NPAT: BDT1652mn), implying +7% revision. BSCC is currently trading at 2022f P/E of 13.3x, 7.2x EV/EBITDA, and 5.6x EV/Sales. Our TP BDT213 implies 2022f 17.0x P/E, 9.6x EV/EBITDA, and 7.5x EV/Sales.

Pharmaceutical Sector - SQUARE (ETR +38%), RENATA (+16%), IBNSINA (ETR +30%)

  • The production and distribution activities of the pharmaceutical businesses, especially the top ones, have resumed to a normal growth trajectory. The emergence of COVID-19 infection has been positive for antibiotics, nutraceuticals, and respiratory drugs.

  • We like SQUARE, RENATA and IBNSINA from the listed pharmaceuticals. We have updated our Price for Renata (from BDT 1,300 to BDT 1,400).

  • Square’s dominance in over-the-counter (OTC) products and antibiotics is likely to keep its sales consistent. The stock is the cheapest in our pharmaceuticals coverage, trading at 11.9x FY21f PE which is c31% discount to its 7Y median PE of 17.3x.

  • Renata is likely to have recovered its growth trajectory in the human pharmaceuticals business as the company recovered from the competitive pressure which started during Apr-Jun 2020 quarter amid the pandemic. Strong bottom-line growth (c21% FY21f, c18% during FY21-25 period), strong balance sheet with net cash position makes Renata attractive despite its c24x FY21f PE multiple (vs 25x 7Y median PE).

  • Ibn Sina is expected to continue strong bottom-line growth (c16% FY21f, c20% during FY21-25 period) driven by a strong focus on Anti-ulcer products, potential expansion in customer and product base, and scale benefit.  IBNSIN’s FY21f PE stands at 16.8x, which is c26% lower than the 5Y historical median PE of 22.8x.

Consumer Sector - OLYMPI (ETR +61%), MBL (ETR +17%), SINGER (ETR 27%)

  • Consumer staples, especially FMCG companies, have shown impressive growth amid the post-lockdown era with the ease of distribution activities and sustained demand. Also, a rise in online sales played a positive role.  Due to the ongoing lockdown, the growth of consumer stocks might slow down a little. But from what we have seen in 2020, we can foresee that consumer stocks will be among the least affected ones with long-term growth trajectory remaining intact.

  • Our top picks from consumer staples are Olympic and Marico. Both of them had been able to generate robust volume growth in the recent quarters and are comparatively less affected by COVID-19. We believe they will recover quickly as the economic activities resume.

  • As many small bakeries and biscuit manufacturers went out of business due to the outbreak of the pandemic, it benefitted the large biscuit manufacturers like Olympic. On top of that, consumer preference has started to shift towards packaged food. Olympic is trading at 13.0x 2022f PE which is c50% discount to its 5Y median PE of 26.0x.

  • Marico has introduced several products in the past few quarters which explains its strong sales growth. Although the price of copra (one of the main commodities of Marico) is on the higher side at present, we think the margin will be sustained in the long run. Marico is trading at 19.0x 2022f PE compared to 5Y expected NPAT CAGR of 12.7%.

  • The business of consumer durables and home appliances has recovered significantly as the economic activities recovered post lockdown period (Apr-May 2020). Strong inbound remittance, lifestyle changes due to more indoor stays have spurred the demand for such products. We like Singer as the company demonstrated strong revenue and earnings recovery post-covid period with 60%+ earnings growth in the immediate past two quarters. Though recent lockdown on the eve of Eid-sales may slow down the consumer buying spree, we expect the demand scenario to be much more buoyant than it was the past year and consider the risk to be priced in. Based on the 2021 expectations, our valuation implies 19.6x 2021f PE, considering c19% earnings CAGR during 2022-2025 period.

 Energy Sector - SUMITPOW (ETR +19%)

  • The country’s electricity generation remained buoyant in 2020 (74,638 million kilo-watt hours vs 74,443 million kilo-watt hours in 2019) after 4% yoy fall in H1 CY 20 amid 66-day covid-lockdown. Power consumption recovered quickly in the latter half of 2020 due to vibrant economic activities. Feb 21 power generation also posted +3% YoY growth. We do not see a major slowdown of economic activities however possibility of periodic restraint in some months driven by limited lockdown declaration prevails.

  • We prefer SUMITPOW BD, as, at the current price, the 22f dividend yield stands 9.3%, which is attractive as the average deposit rate stood at 4.5% in January 2021. We believe the stock can offer upside potential. We reiterate BUY with TP at BDT47.2 (ETR +19.2%) for June 2022. Our TP implies 9.6x 2022f P/E and 5.7x 2021f EV/EBITDA.

Industrial & Material Sector - BRGR (ETR +19%), LINDE (ETR +34%)

  • Industrial paint sales growth to prevail. We are positive about the paint sector amid higher industrial paint sales and a recovery in the decorative segment. Our pick from paints is BRGR. It is the leader in the paint manufacturing industry of Bangladesh with more than 50% market share. Historically, it has been a very high-growth company. Its NPAT grew by 20% CAGR during 2007-15, growth slowed down to 12% during 2016-2020 due to the depressed real estate market. GPM expansion from cheap crude, growth in industrial paints and recovery in decorative segment paint green prospect ahead for BRGR. Further growth potential for BRGR hinges on likely revival in the real estate sector.

  • We change our TP for BRGR from BDT1,809 to BDT1,972 (+9% revision), ETR +19.4% for Jun 2022. This change comes from the change in assumptions. Berger is currently trading at 22.3x 2022f P/E and appears cheap if benchmarked against its 5-yr historical P/E median of 26.4x. It is currently trading at 2022f P/E of 22.3x, 13.2x EV/EBITDA, and 3.8x EV/Sales. Our TP BDT1,972 implies 2022f 26.0x P/E, 15.5x EV/EBITDA, and 4.4x EV/Sales..

  • Riding on higher exposure to the industrial gas segment, LINDEBD to cash on vibrant industrial sector growth. From the beginning of Q3 ‘20, LINDEBD started focusing more on Industrial gases than Healthcare gases to capitalize on the construction rebound. As LINDEBD has had exposure in the industrial gas market and has been operating with excess capacity, the company has been able to pivot quickly to the industrial gas space. We anticipate that in the coming years, LINDE’s Industrial gas business will continue to lead the growth in the overall gas segment considering the government’s push in construction activities and infrastructure projects. We anticipate revenue contribution of the Industrial gas segment will stand at c13% in 2025 (vs 9.5% in 2019). At the same time, we expect LINDE to maintain its leadership position in its core business i.e. electrode manufacturing.

  • We reiterate BUY recommendation for LINDE BD with TP at BDT1,655, suggesting an ETR of +34.0%. This reflects the impact of top-line & bottom-line growth expectation of c12% & c10% CY2021-26 CAGR respectively. Our TP implies 2022f P/E of 17.6x and EV/EBITDA of 10.1x. LINDE BD is trading at 13.5x 2022f & 17.7x LTM PE which is cheaper compared to 18.1x 6Y-median PE. The company is trading at a relatively cheaper valuation than its DM and EM peers (17.7x LTM PE vs 33.3x peer median).

You can find detailed financials in our 24-page report.


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