Equity Note - Active Fine Chemicals Ltd.

ACTIVE FINE CHEMICALS LIMITED

DSE: ACTIVEFINE BLOOMBERG: ACTVC:BD

Company Overview Active Fine Chemicals Limited (AFCL) was incorporated on December 1, 2004 and started its commercial operations on October 5, 2009. The core business of the firm is to produce Active Pharmaceutical Ingredients (API)/ Bulk Drugs and different Laboratory Reagents. To carry out the business, the firm has a multi-purpose bulk drugs and fine chemicals manufacturing facility at Munshigonj on 3.60 acre land. At present, the firm is producing around 25 APIs and around 100 Reagents. Almost 100% revenue came from local sales though the company is exporting some products to Vietnam, South Africa and other countries to some extent. The company’s main raw materials are products of the Biotechnology Industry which are mainly imported from China and India. Materials consumed accounted for around 75% of total costs of goods sold. However, AFCL has established an associate company – AFC Agro Biotech Ltd. (AFCABL) (holding 12% stake) for facilitating uninterrupted supply of some particular raw materials. AFCABL has got listed in the capital market in 2014. AFCL has other associate companies – AFC Solvents Ltd. (12.50% ownership) engaged in chemical trading activities, AFC Capital Ltd. (47.69% ownership) engaged in merchant banking activities, AFC Health Ltd. (17.68% ownership), AFC Agro Biotech Ltd. (12.01% ownership) engaged in chemical industry and AFC Agro Biology Ltd. (16.67% ownership) engaged in chemical industry. The Firm has been enlisted in DSE and CSE on November 22, 2010. Historical shareholding status is shown in the following table: As on

Sponsor

Govt.

Instt.

Foreign

Public

30-Apr-17

12.02%

0.00%

35.67%

3.00%

49.31%

31-Dec-16

12.02%

0.00%

23.14%

3.00%

61.84%

30-Jun-16

12.02%

0.00%

23.14%

3.00%

61.84%

31-Dec-15

12.02%

0.00%

21.50%

2.60%

63.88%

In August 2014, the company raised its capital through issuance of 20 million ordinary shares to the Investment Corporation of Bangladesh (ICB) and/or different institutional investors upon permission of Bangladesh Securities and Exchange Commission for expansion of business which were locked-in for three years. The lockin free up date of the said shares is November 30, 2017.

Company Fundamentals Market Cap (BDT mn) Market weight No. of Share Outstanding (in mn) Free-float Shares Paid-up Capital (BDT mn) 3-month Average Turnover (BDT mn) 3-month Return Current Price (BDT) 52-week price range (BDT) Sector Forward P/E

6,652.2 0.2% 159.9 87.9% 1,599.6 98.2 -2.9% 51.5 37.7 - 53.7 19.6

2014

2015

2016*

2016-17

(Jan-Dec)

(Jan-Dec)

(Jan-Jun)

(9M Ann)**

Financial Information (BDT mn): 1,395.0 1,728.5 Sales 611.0 756.1 Gross Profit 543.5 677.3 Operating Profit 359.2 455.7 Profit After Tax 3,159.0 4,143.9 Assets 38.8 24.2 Long Term Debt 58.7 362.8 Short Term Debt 2,758.6 3,299.2 Equity

940.9 403.3 345.9 222.5 4,766.8 26.6 575.4 3,509.2

2,060.0 970.1 845.8 543.6 5,303.2 4.3 803.9 3,764.6

Margin:

Gross Profit Operating Profit Pretax Profit Net Profit

43.8% 39.0% 34.8% 25.7%

43.7% 39.2% 35.3% 26.4%

42.9% 36.8% 31.5% 23.6%

47.1% 41.1% 35.1% 26.4%

13.7% 15.6% 20.3% 7.3%

23.9% 23.7% 24.6% 26.9%

21.3% 25.4% 20.1% 12.7%

19.2% 28.3% 24.9% 19.3%

14.7% 17.7%

12.5% 15.0%

10.0% 13.1%

10.8% 14.9%

3.1%

9.3%

12.6%

15.2%

3.5%

11.7%

17.2%

21.5%

14.0

14.1

9.0

9.1

6/20

--

5/30+

-/-

0.9%

--

1.0%

--

27%

--

36%

--

22.3 2.9 2.2 17.2

17.6 2.4 2.8 20.6

17.6 2.3 1.4 21.9

14.7 2.1 3.4 23.5

Growth:

Sales Gross Profit Operating Profit Net Profit Profitability:

ROA ROE Leverage:

Debt Ratio Debt-Equity Interest Coverage Dividend History: Dividend % (C/B) + Dividend Yield Dividend Payout Valuation:

Price/Earnings Price/BV EPS (BDT) NAVPS (BDT)

N.B: The Company has changed the accounting year to July-June from JanuaryDecember in compliance of Finance Act 2015. *Growth is calculated for 6 months over same period last year. **Growth is calculated on annualized data over full year of 2015. +Dividend yield was calculated on the closing price on record date for the respective dividend entitlement. The Company has recommended 5% cash & 30% stock dividend for the 18 months period from January 2015 to June 2016.

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May 25, 2017

plant. After completion of the project, it is expected to increase turnover of the company by BDT 720.0 mn to BDT 960.0 mn (approx.) per annum. The estimated cost of the project will be BDT 900.0 million (approx.). The cost of plant will be arranged from the company’s own sources and bank loan. The company has started production on test basis of both the units and will start commercial operation soon. As per 2015-16 annual report, the company’s associate AFC Health Ltd. (17.68% ownership) has signed an agreement with American Oncology Institute to build three world class cancer hospitals in Bangladesh. The company has also invested in chain cardiac hospital with collaboration of Fortis Escorts. Already 2 hospitals are running and 5 more are in the pipelines that are expected to be operational in the next five years. For this purpose, the company has made investment of BDT 1.8 billion in purchase of fixed assets during January 2015 to March 2017.

Industry Overview



According to Directorate General of Drug Administration (DGDA), there are over 250 registered small, medium and large enterprises are engaged in the industry where the top 10 pharmaceutical companies are jointly holding around 70% share of the drug market.

Meanwhile, construction of 200-acre API Park is in progress. A total of 42 industries would be set up under the project; expected total cost is BDT 4.39 billion. Upon operational of the plant, the raw material imports are expected to come down to 30% and the costs of APIs are estimated to decrease by around 20%. The API industrial park promises to propel Bangladesh to the next level as a drug exporter since it is expected to help the local pharma companies gain more export orders with a competitive edge and maintain stable prices in the domestic market. Investment Positives 



The company maintains a steady growth in its turnover and profit after tax. 5 year CAGR (Compound Annual Growth Rate) of turnover and profit after tax of the company are 35% and 30% respectively. As per DSE news published on January 2016, the company has decided to produce Cephalosporin Antibiotics and other related chemicals. It is expected that the turnover of the company will increase approximately by BDT 720 mn – BDT 960 mn per annum from this unit. The Board has also decided to set up an Anti-Cancer Formulations 2

Investment Negatives 

The company is exposed to foreign exchange risk, as the company’s 95% raw materials are imported. Profit After Tax (BDT mn) 544 456 359

335 223

2012

222

2013

2014

2015

2016 (Jan-Jun)

2016-17 (Jul-Mar Ann)

Historical Price (BDT) & Volume ('000) Movement 120 Closing Price (BDT)

However, supply side of this industry mostly depends on import. Around 80% of required raw materials are imported from China and India whereas some local companies – Beximco Pharmaceuticals Ltd., Square Pharmaceuticals Ltd., Opsonin Chemicals Ltd. Drug International Ltd., Globe Pharmaceuticals Ltd., Gonoshashtaya Pharmaceuticals Ltd, Sunipun Pharmaceuticals Ltd. etc. – produce certain APIs on smaller scale for mainly in-house use. The local companies usually run the relatively easier final chemical synthesis stage with API intermediaries, instead of the complete chemical synthesis.

Closing Price (BDT)

Volume ('000)

15000

100 10000

80 60

5000

Volume ('000)

Country's pharmaceutical sector has witnessed phenomenal growth in recent years in terms of capacity building, local consumption and feeding the international market. Pharmaceutical Industry of Bangladesh, currently valued at BDT 160 billion up from an estimated total of BDT 30 billion some 12 years ago, primarily produces generics drugs of around 8,000 different brands which can furnish up to 98% of the domestic demand. The country is now exporting to more than 127 countries after meeting 98% of the local demand. The market grew at an average rate of over 10%.

40 20 May-13

May-14

May-15

May-16

0 May-17

Movement of DSEX & ACTIVEFINE Index (Rebased) 250

DSEX

ACTIVEFINE

200 150 100 50 May-13

May-14

May-15

May-16

May-17

May 25, 2017

Pricing Based on Relative Valuation:

Concluding Remark Multiple 19.6

Value (BDT) 66.6

Sector Trailing P/E

17.1

48.7

Market Forward P/E

15.7

53.3

Market Trailing P/E

15.0

42.8

2.9

67.7

Sector Forward P/E

Sector P/B

The company runs monopoly business in API market. In its latest 9 months (Jul 2016 to Mar 2017) performance declarations, the company reported net profit of BDT 407.67 million registering 9% growth over the same period last year. The company’s profitability is expected to increase upon initiation of operation of its Cephalosporin Antibiotics and Anti-Cancer Formulations plant. Source: Annual Report, the Financial Express, the Daily Star, ILSL Research, Company’s website, DSE website & CSE website.

ILSL Research Team: Name Rezwana Nasreen

Designation Head of Research

Towhidul Islam Kawsar Ahmed

Sr. Research Analyst Research Analyst

To access research through Bloomberg use ILSL research is also available on Thomson Reuters products and on FactSet platform For any Queries: [email protected]

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Disclaimer: This document has been prepared by International Leasing Securities Limited (ILSL) for information only of its clients on the basis of the publicly available information in the market and own research. This document has been prepared for information purpose only and does not solicit any action based on the material contained herein and should not be construed as an offer or solicitation to buy or sell or subscribe to any security. Neither ILSL nor any of its directors, shareholders, member of the management or employee represents or warrants expressly or impliedly that the information or data of the sources used in the documents are genuine, accurate, complete, authentic and correct. However all reasonable care has been taken to ensure the accuracy of the contents of this document. ILSL will not take any responsibility for any decisions made by investors based on the information herein.

May 25, 2017