Revenue grew by 11% yoy. Square brings much awaited double-digit top line growth after four quarters in an attempt to protect its market share amid fierce competition. While the low double-digit growth in domestic sales is mostly in-line with our expectation, its performance still lags Renata and Beximco in this quarter. We believe restructure in its sales force and launch of Kenya plant will help Square generate c14% growth during FY 20 – FY 23.
Reiterate Buy (ETR 25.1%). Square trades at 14.0x 2020f PE, 10.5x 2020f EV/EBITDA, 3.7x 2020f EV/Sales and appears discounted from its fundamentals. We reiterate Buy with the expectation that the recovery of Square’s growth trajectory will act as a potential catalyst.
Earnings grew by 5% yoy; one-off tax expenses for the merger. Q3 18/19 EPS stood at BDT3.95, underperforming our expectation by 7.5%. The decline in gross margin (-158bps yoy) and increase in opex/sales (+30bps) were offset by the return from cash reserve and earnings from associates. However, the effective tax rate increased by 447bps to 28.4% and slowed down earnings growth. We think the merger between Square Pharmaceuticals and Square formulations triggered one-off tax expenses.
Strong balance sheet grew stronger, but excess cash provides a low return. Will Square focus on export? As excess cash grew to USD316mn (BDT30bn, +37% yoy), Square’s ROE drops to 20.3% (-268bps yoy). The return on cash being lower (8%), bears possible reinvestment risk. Apart from USD25mn venture in Square Kenya, Square made an investment for a few ANDAs and got one for Valsartan in April 2018. We think the focus on export would be a better use of the excess cash and may potentially accelerate Square’s top line.