- We expect the continuation of positive stock market momentum in 2021 which started from July 2020
- Economic activities recovery, low-interest rate regime, strong BDT & restored investor confidence are the key drivers
- We recommend buy for 11 stocks from Consumer, Pharma, Telco, MFS and industrials
Bangladesh to return to its high growth trajectory
Before the pandemic hit the country, Bangladesh's economy maintained a steady 6%+ growth rate during FY10-FY15 and 7.0%+ growth rate during FY16-FY18, and 8.15% in FY19. However, the COVID-19 pandemic severely impacted nationwide mobility since March and slowed the GDP growth rate to 5.24%. The government is aiming at 8.2% GDP growth suggesting a V-shaped recovery path of the economy in FY21. Much like the government’s target, ADB’s projection shows 6.8% growth for Bangladesh’s economy for FY21. The economic activities in both rural and urban areas have reached the pre-pandemic level. We have also seen a recovery in export (0.9% YoY growth in 5m FY 21) and astounding growth in remittances (41.1% YoY growth in 5m FY 21). However, the import (-13.0% YoY in 4m FY 21) is yet to reach the Pre-Covid level. While the domestic economic activities are running near the pre-pandemic level, the government has already inked deals to procure 30 million doses of the vaccine developed by AstraZeneca. Overall, we expect the economy to return to near its pre-pandemic growth trajectory in 2021.
Money market liquidity to continue
Bangladesh Bank (BB), the central bank of Bangladesh, implemented a 9% rate cap from 1st April 2020. After the pandemic hit the country, BB came up with different policy relaxations such as – policy rates cut, CRR reduction, special 364-day repo introduction, loans classification relaxation to increase the money market liquidity. Besides, higher remittance inflow along with subdued imports made Bangladesh Bank buy USD from local banks thus increased BDT liquidity. As a result, excess liquidity of the country’s banking system increased to an all-time high of BDT1.7tn. We expect the low-interest rate regime to continue till September 2021 at least because of this higher money market liquidity.
Forex reserve reached historical high; No pressure for BDT depreciation
Bangladesh’s foreign exchange reserve reached USD 43bn landmark in December, 2020 registering more than 32% growth YoY. This amount is sufficient for the country to settle import payments for 10 months. Such growth in foreign exchange reserve is attributable to the surprisingly high inbound remittance growth since the very start of the fiscal year 2020-21 and lower import payments amid the pandemic. The central bank is now purchasing greenbacks from the commercial banks to prevent appreciation of the local currency. If we put this in number, the central bank bought around USD 3.6bn greenbacks in only four months of the current fiscal year (Jul-Oct 2020) while it bought only USD 877mn in FY20 (full year). Our external debt is only USD 48.7bn (14.8% of GDP) with no immediate repayment covenant. Most of the loans are highly long-term in nature. Since there is no imminent scenario calling for unusual high dollar payments for debt repayments or imports, we do not see any impending pressure for BDT depreciation as well.
New BSEC leadership restores investor confidence
The newly formed commission of BSEC is taking pro-market and pro-investor stances to bring back the public confidence of the capital market. The commission is stringent in enforcing regulatory compliance on listed companies. The new commission is also aiming to increase the Depth of Market (DOM). Under the current commission, we saw the listing of large-cap companies such as Robi Axiata (2nd largest telecom in Bangladesh) and Mir Akhter Hossain Ltd (one of the leading construction companies). Besides, BSEC’s better coordination with the central bank and finance ministry helping in the recovery of market participant’s confidence.
We like Consumer, Pharma, Telecom and MFS particularly
Bangladesh, being a growing economy with rising per capita income, will have a higher demand for consumer products. Besides, a higher income level will increase health awareness among people. On top of that, telecom and MFS will reap the benefits of the journey towards digitalization. Hence, we like SQUARE, RENATA and IBNSIN from pharmaceuticals; OLYMPI, BATBC, SINGER and RECKIT from consumers, GRAM and BSCC from telecom and BRAC from banks due to its MFS subsidiary bKash. Besides we like BRGR from the industrial sector.
Risk: 1. Uncertainty over the second phase of COVID-19; 2. Change in low-interest-rate regime; 3. Inconsistent policy change
Table 1: Top picks for 2021
Source: IDLCSL Research
Table 2: Key Investment Theme for Top Picks
Economy update – Back to its fast growth trajectory
Domestic activities reached pre-pandemic level: After the initial hit of the COVID-19 pandemic, the economic activities in both rural and urban areas have reached the pre-COVID level from a near standstill situation prevailing in April-May 2020.
Vaccination by February: Bangladesh’s death rate as the percentage of total positive cases is 1.5% lower than the global average of 2.2%. Besides, Bangladesh ranked 20th in the world and 1st in South-Asia in Covid Resilience ranking (according to Bloomberg). Besides, the Bangladesh government has taken a proactive measure to secure vaccines and already inked a deal with Serum Institute of India for 30 million doses of Oxford–AstraZeneca vaccines. The government expects vaccination will be available by late January or early February. We expect that private companies will bring vaccines adding to the government’s effort. Unless another fatal strain of the virus emerges for which there is no cure, we do not see any severe impact on the economy in 2021.
Money market liquidity to prevail: After the pandemic hit the country, BB implemented an expansionary monetary policy and relaxed policies to ensure enough liquidity in the money market. Meanwhile, surprising growth in remittance earnings (c41.3% YoY in 5 months of FY21) helped to improve the overall liquidity situation. However, the private sector credit growth slowed down amid the pandemic. Because of the intertwined impact of the above-mentioned catalysts, excess liquidity of the country’s banking system increased to an all-time high of BDT1.7tn. We expect that there will be no pressure on money market liquidity in 2021. (Detail analysis in Annexure A)
Remittance grew substantially: Despite the initial fear for a significant dent in inbound remittance because of restricted mobility and slowdown in the global economy, Bangladesh’s remittance earnings made a quick turnaround with surprising growth. It grew by c41.3% YoY in the first five months of the current fiscal year (Jul-Nov 2020). The government’s 2% cash incentive and expats’ remittance mobilization through formal channels facilitated the surprising growth.
C/A turned into positive: Export made a V-Shaped recovery while the import situation is yet to reach the pre-pandemic level. As a result, the trade deficit narrowed substantially. Hence, the strong remittance growth and the narrowed trade deficit have taken Bangladesh back to C/A surplus (USD 4.0bn in 4m FY21) after 4 years of negative territory.
Bangladesh Bank took an expansionary stance: Bangladesh Bank, the central bank of Bangladesh, has taken an expansionary monetary policy stance since March to ensure there is not liquidity pressure in the economy. BB came up with different policy relaxations such as – policy rates cut, CRR reduction, special 364-day repo introduction, loan classification relaxation to increase the money market liquidity.
The second stimulus package to be declared soon: The government announced a package of more than BDT1.01tn (c3.3% of GDP) in May 2020 to stimulate the economy. Most of the funds were disbursed through commercial banks in the form of subsidized loans to the affected businesses. In anticipation of the second wave of COVID-19, the Prime Minister has instructed the finance ministry to formulate a second stimulus fund.
Government’s tax revenue gradually picking its pace: The exchequer’s tax revenue collection dropped by 2.5% in FY20 amid the pandemic. However, with the quick turnaround of the economy, the government’s tax revenue increase by c5.47% YoY during July-Oct 2020.
Update on Sector
Digitalization to drive the growth; our only pick BRAC (ETR +49.0%)
Uncertainty of NPL surge when relaxation period ends; 1% special provision to provide cushion: Considering the COVID-19’s severe impact on businesses and resultant uncollectible loan amount, the central bank relaxed the loan classifications policy. From January 01, 2020, banks now don’t need to – i) classify any previously unclassified loans, ii) further downgrade the previously classified loans – for non-payment issues. The extension of such relaxation will continue till December 31, 2020. According to our insight, around 20%-30% of total borrowers are taking these relaxation benefits. It makes it hard to assess the actual asset quality (as of September 2020 the official figure for gross NPL is c8.8%) of the banking sector during this relaxation period. Hence, the true asset quality of the banks will unfold once the loan classification relaxation period ends. However, a 1% Special COVID-19 Provision on all unclassified loans – recently enforced by the central bank – will provide some cushion against the current problem.
Spread may improve slightly but not to the pre-rate cap level: Bangladesh’s central bank implemented a 9% lending rate cap on April 01, 2020. As a result, the spread fell to 2.77% in July 2020 (lowest in history). To improve the spreads, banks lowered their deposit rates. In November 2020 weighted average deposit rate in scheduled banks stood at 4.64% - the lowest in the country’s history. Hence, the spread improved to 2.94% in November 2020. We expect further improvement in the spread in 2021. However, it may not reach the earlier 4.0% level amid the rate cap.
Private sector credit growth may pace up: Bangladesh’s private sector credit growth flipped to a negatively sloped trend two years ago. The private sector credit growth deteriorated further amid the pandemic and rate-cap owing to banks’ cautious stance. However, as economic activities are increasing, we expect that private sector credit growth will improve in 2021. BB has a target credit growth of 14.8% in FY 2021 compared to the current 8-10% level.
Some banks may realize their investment gain amid low treasury yield: Before the pandemic hit the country, Bangladesh's treasury bond rate hovered around 6-9.5% depending on the maturity. The treasury rate was in the same range till June 2020. However, with the very start of the new fiscal year, we have seen a 300-400bps fall in treasury rate. Some banks may realize the one-time investment gain in the low treasury rate period. This gain may partially offset banks’ loss on keeping 1% special COVID-19 provision.
Pandemic is a blessing in disguise for the Mobile Finance Service (MFS) industry: The spread of the contagious virus and the limited banking services from April to May led to stronger adoption of mobile financial services. As of October, 2020 around 33.2 million customers were actively using mobile money and the registered clients number reached 96.4 million. More than 13.8 million new accounts have registered after the pandemic hit the country. From May to October (we are excluding April since some agent points of MFS companies were closed), the transaction growth is approximately 36% YoY. We believe that the pandemic has taken the mobile financial services industry two years forward and it is a blessing in disguise for companies like bKash – a subsidiary of BRAC Bank Limited.
We like BRAC BD because the bank is well-governed and well managed. It is leading the country’s SME financing business. Besides, its mobile money subsidiary – bKash is supposed to be the biggest beneficiary of the country’s digitalization journey. bKash holds more than 70% market share in the MFS industry. At the current market cap of USD 691mn, BRAC is trading at only 0.6x of its banking business NAV if we adjust for our bKash valuation of USD 942mn. Our USD 942mn valuation of bKash might prove conservative depending on the success of the P2B business.
A giant leap in data; We prefer GP (ETR +33.4%), BSCCL (ETR +17.6%)
A sustainable increase in telecom data revenue. Industry data revenue increased by c17% YoY in Sep 2020. Even after the post-lockdown period, industry data revenue increased by c4% QoQ (from Q2 20 to Q3 20), mainly driven by growth in the subscriber base, thus suggesting that this leap in data revenue is sustainable.
Industry data ARPU increased by c12% YoY in Q3 20. The pandemic uplifted average data revenue per user from BDT 55 in Sep 2019 to BDT 62 in Sep 2020. Average MB per user (AMBPU) increased from 1,700 level to 2,650 level (+54% YoY) during the period. Banglalink was the main beneficiary with c27% increase in data ARPU (from BDT 33 to BDT 41), followed by Robi (+c10%, from BDT 58 to BDT 63) and Grameenphone (+c8%, from BDT 64 to BDT 69). It happened during a period when the government increase value-added tax (VAT) on data by 500bps (from 10% to 15%) to maximize tax collection from telecom operators.
The voice usage, however, is yet to reach the pre-pandemic level. Though consumption of voice minutes has recovered from the lockdown period (Q2 20), it is below the pre-pandemic level because of lower economic activities, education-at-home activities, and a shift toward data usage. But we think new customer acquisition will partially offset the dent in average minutes per user (AMPU), thus keeping the revenue base at a similar level. This is particularly true for Grameenphone.
The implementation of the tower sharing guideline means network improvement for Grameenphone. The guideline forbids any telecom to build its tower, thus limiting GP’s network expansion process in 2019 and 2020. With the implementation of the guideline from October 2020, Grameenphone has resumed its network expansion process and likely to improve its network strength which experienced a dent from its usual level due to regulatory bottlenecks. Please note that the second largest operator Robi started a collaboration with the tower sharing company Edotco from FY18.
The dispute about the contingent liability remains unsolved, but we expect no immediate cash outflow for settlement. The amount of total contingent liability stands at BDT c126bn (BDT c93/share) for Grameenphone and BDT c35bn (BDT c6/share) for Robi. Though the disputes are yet to be settled, we expect no significant cash outflow for Grameenphone in 2021 as the company has already paid BDT20bn deposit to the regulator.
Robi started trading on the 24th December. Robi raised BDT 5.2bn (USD c62mn), diluting 10% ownership by issuing 523.8mn stocks (free float 387.7mn stocks). Robi made BDT 191mn LTM profit (EPS BDT 0.04/share) with c41% LTM EBITDA margin and currently trading at BDT156bn (USD1.8bn) market cap, 6.8x LTM EV/EBITDA, 2.8x LTM EV/Sales.
We prefer Grameenphone (ETR c33.4%) as it offers c8% dividend yield. With 60%+ EBITDA margin and c8% dividend yield, Grameenphone is currently trading at 12.6x 2021f PE, 5.2x 2021 EV/EBITDA, 3.3x 2021 EV/Sales. Our TP BDT435 implies 15.5x 2021f PE, 7.0x 2021 EV/EBITDA, and 4.4x 2021 EV/Sales.
BSCCL to capitalize on bandwidth monopoly amid sustaining digital adoption. Average bandwidth consumption posted 100% YTD growth in Aug 2020 amid pandemic-driven digital engagement. We believe the digital adoption to sustain and BSCCL to capitalize on it due to its bandwidth monopoly with c68% market share. BSCCL is currently trading at 2022f P/E of 14.5x, 7.8x EV/EBITDA, and 5.9x EV/Sales. Our TP BDT192 implies 2022f 16.8x P/E, 9.3x EV/EBITDA, and 7.0x EV/Sales.Risks to our recommendation include uncertainty regarding share issuance to the government, possible earnings volatility from the bad debt provision, and privatization of the submarine cable operating license, however not imminent.
Resuming to stable growth trajectory; We prefer Square (ETR +23.1%), Ibn Sina (ETR +28.7%), Renata (ETR +18.1%)
Smaller companies lost market share during the pandemic. The pharmaceutical industry of the country is estimated to have lost over 20% sales in Q4 FY20 (Apr-Jun 2020) due to a 66-day lockdown. However, the listed pharma companies, which cover 40%+ market share, reported c1% dent in YoY sales during Q4 FY20. It suggests that the smaller companies lost market share during the quarter whereas the larger companies with strong distribution channels gained their business.
Q1 FY21 figures demonstrated a strong recovery in sales. The patient flow dropped to almost 50% level during the lockdown and then it resumed to c60% of the pre-pandemic level during the June-July period. Gradually, the patient flow recovered and reached c90% in October 2020. The Q1 FY21 showed c9% topline growth for the listed universe suggesting that the industry is back in business. We expect better numbers in Q2 FY20 (Oct-Dec 2020) driven by higher patient flow (over Q1 FY21), new product launch, and resumption of marketing activities.
Square is likely to have a better growth trajectory in FY21. The company continued its manufacturing and distribution during the pandemic and its sales dent was only c4% in Q4 FY20. Square achieved a c11% growth rate in Q1 FY21, which was 240bps higher than the growth of the listed universe. Square refocus on branding and marketing activities, promoting esomeprazole brand Nexum to compete with Healthcare’s Sergel and recoup the lost market share suggests that Square is likely to have a better topline growth in FY21. Square is currently trading at 11.1x FY22f PE, 7.5x FY22f EV/EBITDA, 2.7x FY22f EV/Sales. Our TP BDT265 (ETR 23.1%, TP revised upwards by c4%) implies 13.4x FY22f PE, 9.2x FY22 EV/EBITDA, and 3.3x FY22 EV/Sales.
Renata is likely to grow as consistent as its past, with increased cash pay-out. We expect Renata to maintain a consistent high growth trajectory with its focus on high growth segments such as cardiovascular. Also, we expect an increased cash payout as the company moves to a debt-less structure. We updated Renata’s TP upwards by c18% (from BDT1,100 to BDT 1,300). Renata is currently trading at 18.7x FY22f PE, 12.4x FY22f EV/EBITDA, 3.5x FY22f EV/Sales. Our TP BDT1,300 (ETR 18.1%) implies 22.0x FY22f PE, 13.8x FY22 EV/EBITDA, and 3.9x FY22 EV/Sales, considering expected c18% earnings CAGR during FY21-25.
We have added Ibn Sina to our coverage for its high growth trajectory. The company generated a 5Y earnings CAGR of 30%. The company has much scope to expand its product breadth, and get the benefit of scale (NPAT margin only c6%). Ibn Sina is currently trading at 14.1x FY22f PE, 9.9x FY22 EV/EBITDA, 1.1x FY22f EV/Sales. We initiated Ibn Sina with a TP of BDT 310 (ETR 28.7%), implying 17.9x FY22f PE, 12.4x FY22f EV/EBITDA, and 1.3x FY22f EV/Sales, considering expected c20% earnings CAGR during FY21-25.
Growth trajectory remains intact despite the pandemic; We recommend OLYMPI (ETR +29.8%), RECKIT (ETR +24.6%), BATBC (ETR +16.0%), SINGER (ETR +18.5%)
Momentum of Consumer stocks to remain strong: In the wake of the Covid-19 pandemic, the growth of consumer stocks stumbled, but only momentarily. As a 66-day lockdown started from 22nd March, supply chain distribution initially faced some challenges. But they got resolved as economic activities started to normalize. Our coverage stocks saw mixed impact but our top picks maintained growth. The long-term growth trajectory of consumer stocks remains intact.
The pandemic changed people’s hygiene practice; Reckitt got the most out of it. With rising income levels and a growing MAC population, demand for Household and Toiletries (H&T) products can only shoot up soon as the industry remains underpenetrated till now. Reckitt, being the market leader in many H&T product categories, is expected to be one of the major beneficiaries of the industry growth. Moreover, there is always a possibility of introducing new brands with the continuous rise in income level. Reckitt is currently trading at 22.8x 2021f P/E and appears cheap if benchmarked against its 5-yr historical P/E median of 27.4x. It is currently trading at 22.8x 2021f PE, 13.2x EV/EBITDA, 3.1x EV/Sales. Our TP BDT4,872.2 implies 2021f 27.4x PE, 16.1x EV/EBITDA, and 3.8x EV/Sales.
Shift towards organized biscuit industry is boosting Olympic’s sales. Olympic is the market leader in the organized biscuit industry and growing its topline consistently (c12% CAGR in last five years). Olympic is continuously launching new biscuits and diversifying product portfolio to maintain a strong topline growth. That is why it generated 17.5% YoY growth in revenue in Q1 FY21 (Jul-Sep 2020). It is currently trading at 14.4x 2022f P/E and appears cheap if benchmarked against its 5-yr historical P/E median of 29.2x. Olympic is currently trading at 2022f P/E of 14.4x, EV/EBITDA of 8.6x, EV/Sales of 1.7x respectively. Our TP BDT242 implies 2022f 18.3x P/E, 11.1x EV/EBITDA, and 2.2x EV/Sales.
Strong distribution channel helped BATB stay ahead. Though overall cigarette consumption remained low due to the slower economy, BATB maintained its position. Sales grew by taking market share from its competitors and unorganized market segment. BATB is currently trading at 18.9x 2021f PE, 8.1x 2021 EV/EBITDA, 3.2x 2021 EV/Sales. Our TP BDT1,325 (ETR 16.0%) implies 21.2x 2021f PE, 9.1x 2021 EV/EBITDA, and 3.5x 2021 EV/Sales.
Worst seems over for consumer durable products. We prefer Singer. During the lockdown, Singer’s shops were mostly closed, resulted in a 40% YoY dent in sales in Q2 2020 (Apr-Jun 20). However, Singer generated 10% YoY sales growth in Q3 20 when the economy started reviving. With the economy being almost reinstated to its former level, we think Singer’s sales will rebound in 2021 driven by the hire-purchase business model in a low-interest rate scenario. Meanwhile, production efficiency is likely to make its product prices more attractive to customers. Singer is currently trading at 16.5x 2021f PE, 8.8x 2021 EV/EBITDA, 1.2x 2021 EV/Sales. Our TP BDT200 (ETR 18.5%) implies 18.8x 2021f PE, 9.9x 2021 EV/EBITDA, and 1.3x 2021 EV/Sales, considering a 20% earnings CAGR during 2021-25.
Industrials & Materials
Industrial recovery plows on amid Govt. infrastructural push (BRGR – ETR +15.9%)
Industrial paint sales growth to prevail. Industrial paint sales growth to prevail. We are positive on 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.
Berger is currently trading at 19.6x 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 19.6x, 11.2x EV/EBITDA, and 3.3x EV/Sales. Our TP BDT1627 implies 2022f 22.3x P/E, 12.8x EV/EBITDA, and 3.8x EV/Sales.
Please see the report for 2020 stock market review and stocks financials.
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The information contained in this report has been compiled by IDLC Securities Limited (IDLC-SL) from sources believed to be reliable, but no representation or warranty, express or implied, is made by ...