Equity Analysis /
Bangladesh

Linde Bangladesh Ltd: Riding on vibrant construction sector; Initiate with BUY

  • Higher industrial gas production to capitalize on vibrant construction sector

  • Infra-driven fast recovery proves LINDE’s resilience; Electrode business to remain buoyant

  • Construction rebound is expected to remain buoyant on the back of the long-term growth drivers

Auneea Haque
Auneea Haque

Research Associate

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IDLC Securities
5 April 2021
Published byIDLC Securities

Linde Bangladesh is the leading Healthcare & Industrial Gas and Electrode manufacturer in Bangladesh

The company derives 66% revenue from its Electrode segment, and the rest 34% from ASU Gases (20%), Dissolved Acetylene (2%) & Others (12%). LINDE BD has two factories in Narayanganj (Rupganj) & Chittagong.

Initially incorporated as Bangladesh Oxygen Limited (BOL) in 1973, the company set up its first CO2 plant in 1976. In 1995, the company introduced its first welding production line and a 30 tonne-per-day (TPD) ASU plant at Rupganj. In the same year, the company became a subsidiary of the BOC Group Limited, UK, and changed its name to “BOC Bangladesh Limited”. In 2006, BOC Group Ltd. got acquired by German industrial gas and engineering company, Linde AG. Thus BOC Bangladesh Ltd. became a part of Linde and changed its name to Linde Bangladesh Limited in 2011.

The BOC Group Ltd. holds 60.0% shares as a sponsor/director. Investment Corporation of Bangladesh (15.0%), Lankabangla Securities Ltd. (1.0%), Sadharan Bima Corporation (1.3%), Pubali Bank Ltd. (1.1%), Pubali Bank Securities Ltd. (1.5%), and Other investors (20.1%) hold the rest shares as of Dec 2019.

LINDE BD got listed in the Bangladesh capital market in 1976. The company owns 100% of BOL and BOC Bangladesh Ltd. However, both the subsidiaries are not in operation.

Higher exposure to the industrial gas segment to cash on vibrant industrial sector growth

LINDEBD reports revenue under 4 (four) segments – Electrodes (66%), ASU (Air Separation Unit) gases (20%), Other industrial goods (12%), and Dissolved acetylene (2%). Toning with the Linde Group, LINDE BD has been increasing its focus and investment in the ASU gas segment. ASU gases and Dissolved acetylene comprise LINDE’s overall gas business. Of the total gas segment, Healthcare (HC) gases contribute to 57%; the rest comes from Industrial gases (43%).

From the beginning of Q3 ‘20, LINDEBD started focusing more on Industrial gases than HC 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 believe LINDE’s ASU gas business will grow at c15% CY2021-26 CAGR on the back of the newfound development in industrial gas. We also 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).

Electrode business to remain buoyant

LINDE’s electrode business grew at c7% CY2014-CY2019 CAGR. Volume sales grew at 6.5% CY14-19 CAGR on the back of the Government’s infrastructure push. Despite several setbacks e.g. muted real estate sector, price war from regional players, etc., LINDE remains the leading player in the local electrode market. As the product quality of other players is not as consistent as LINDE’s, it is likely to remain the most preferred brand for large construction projects. We expect volume sales of electrodes to grow at c13% 2021f-2026f CAGR after a dip in 2020 to maintain a c7% 2019-2026f CAGR driven by vibrant construction activities and real estate rebound.

Infra-driven fast recovery proves LINDE’s resilience

The country’s construction sector rebounded fast on the back of large infrastructure projects and increasing demand for construction materials alongside fresh investments in all related sectors. Government infrastructure projects including Padma Bridge and Payra Port, development works of special economic zones, housing construction both in urban and rural areas led by remittance inflow and setting up of new industries are already indicating a faster recovery in the industrial sector. LINDE’s diverse portfolio with industrial products like Electrodes (66%) and Industrial gas & welding products (21%) and more industrial gas market exposure helped the company to cash on the benefit of industrial rebound. Please note that, in Q3 ’20, just after the lockdown, LINDE was able to recover to the pre-pandemic level with 44% yoy bottom-line growth driven by construction rebound.

Construction rebound is expected to remain buoyant on the back of long-term growth drivers

  • We expect the country’s remittance inflow to remain at the H1FY21 level of USD2bn monthly in Q4FY21 totaling USD25bn in FY21 (+36% yoy). Construction activities in rural areas, as well as urban areas, are expected to remain afloat on the back of buoyant remittance inflow.

  • Govt. has taken several mega infrastructural projects and their completion time spans from 2021 to 2028. Huge amount of electrodes and industrial gases will be consumed in these mega infra-projects.

  • Bangladesh entered the low-interest rate regime with the imposition of a rate cap in April 2020. Most banks have started taking a cautious stance in case of lending after the imposition. Also, monetary stimulus from the government and higher remittance flow injected liquidity into the financial system. Deposit rates have been on the lower side. The weighted average deposit rate came down 4.6% in Nov 2020 vs 5.5% in 2018. All these led the investors to revise their investment options. Hence, some spillover investment has already come to the real estate sector. Also in the FY2019-20 budget, flats and plots purchase using undisclosed money without being questioned was opted in. Along with that reduction of bank loans' interest rates and giving government officials housing loans on easy terms prop up a strong real-estate rebound.

  • After a dip in Covid-lockdown, the Bangladesh shipbuilding sector has shown signs of rebounding. Although orders from the global market have slowed down, domestic demand has helped the industry to withstand the economic shockwave brought by the Covid-19 pandemic. Moreover, in January, Shipbuilding Policy 2021 has been approved where the import of all types of ships with a capacity below 5,500 tonnes, and length less than 100 meters, has been banned. The local shipbuilding market is expected to get extra push over this improvement and electrode sales are expected to increase.

  • Bangladesh Pre-Engineered Building (PEB) structure sector has been growing around mid-double digit for last 7 years. The local PEB market is expected to grow more than double digits in the coming five years on the back of the country’s infra-push and buoyant industrial activities.

All these are expected to drive the demand for industrial products like electrodes and industrial gases.

Strong financials suggest LINDE’s resilience

LINDE BD has managed its working capital quite efficiently; its cash conversion cycle was negative 21 days in CY 19, It has reached a cash-rich position (9MCY20 cash balance BDT2,279mn, BDT150 per share). Efficient cash management allowed LINDE to do business without incurring any debt. We expect LINDE to maintain its efficient level of cash conversion cycle going forward. We anticipate a moderate Capex requirement since spare capacity is available. Also, unlike other companies in construction material industries like cement, steel, etc. LINDE has a strong balance sheet with zero debt, c26% RoE, and c17% RoA. On the back of the financial strength, LINDE is expected to remain resilient in the Covid-19 critical situation.

We initiate LINDE BD with BUY recommendation with TP at BDT1,638 for December 2021

We initiate LINDE BD with BUY recommendation with TP at BDT1,638 for December 2021, suggesting an ETR of +31.2%. This reflects the impact of top-line & bottom-line growth expectation of c12% & c10% CY2021-26 CAGR respectively. Our TP implies 2021f P/E of 19.8x and EV/EBITDA of 11.4x.

LINDE BD is trading at 15.6x CY2021f & 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).

Risks

Risks to our recommendation include the continuation of multiple disastrous waves of the novel coronavirus, prolonged economic impact thereof, and volatility in the commodity market.

LINDEBD’s margins remained volatile in previous years due to volatility in copper and iron ore prices as they are correlated with the main raw material, Mild Steel Wire (MS Wire). Due to cheap raw materials amid dip in the commodity market, 9M 20 gross margin increased by 338bps yoy (46.9% vs 43.5% in 9M 19). We expect LINDEBD to post 47.5% GPM in 2020 (+333 bps yoy). However, we expect GPM to reverse from the current peak due to the upward trend of copper and iron ore prices and stabilize around a sustainable level of c44%.