Square Pharmaceuticals’ valuation in the secondary market does not reflect its growth in earnings in the last more than a decade.
The company earned a profit of Tk 3.62 billion in FY12, which gradually rose to Tk 20.93 billion in FY24. It registered a year-on-year growth of 5-54 per cent in earnings between 2012 and 2024.
However, yearly price returns of the stock have not been as impressive, except for FY14. It experienced a 94 per cent annual price return against a 20 per cent year-on-year profit growth in FY14.
In the rest of the decade, the stock witnessed insignificant annual capital gains. The price returns were even negative in FY19, FY20 and FY23.
Stocks are expected to perform well in the equity market when the companies they represent show consistency in growth in business. That has not happened with the country’s leading drug maker.
“Square Pharmaceuticals is severely undervalued in the secondary market,” said Asif Khan, chairman of EDGE Asset Management.
Experts say Square Pharma has remained “undervalued” in the stock market, not only compared to its peers but also to any other good performers of other industries.
Currently, Pharma Aids trades at around Tk 531 per share on the Dhaka bourse while Libra Infusions at Tk 787 per share. The P/E ratio, which shows the price of a stock relative to its earnings, of the former is more than 27 while it is an astonishing 5,251 of the latter based on the companies’ latest audited financial statements.
The P/E ratio often helps determine whether a stock is overvalued or undervalued.
Square Pharmaceuticals’ P/E ratio is 9.31, with Thursday’s stock price and latest audited financial results taken into consideration, while according to EBL Securities the overall market’s P/E ratio is 16.14.
“The market has not evaluated the company’s [Square Pharma’s] earnings growth,” said Md. Ashequr Rahman, managing director of Midway Securities.
“My personal opinion is that the company is undervalued compared to any other good performing company listed on the bourses,” he added.
Apart from local companies, the P/E ratio of Square Pharma is also much lower than well-performing multinational companies.
Mr Khan and Mr Rahman offered some explanations as to why the drug maker is undervalued in the secondary market.
Mr Rahman said stocks move on the bourses on a daily basis depending on collective sentiment of investors. A company may be treated as fair valued by some investors whereas others may consider it overvalued or undervalued.
“Investors’ assessment of possible capital gains has a role in the valuation of a stock.”
Square Pharma has more than 500 million shares as free float comprising 57.09 per cent of its outstanding shares. The sheer amount of shares has the advantage of low price volatility but at the same time the stock’s movement is slow.
Moreover, the market lacks professional, institutional and foreign investors that usually make large equity investments.
General investors have little financial literacy. Besides, a majority of general and financial institutions might have thought that there was no scope of quick capital gains by investing in Square Pharma. The stock has remained almost static because of the large amount of free float amid the liquidity crisis.
Mr Rahman said he himself had been reluctant to invest in the stock. “But it’s an injustice to the company having a good record of profit growth.”
Mr Khan, chairman of EDGE Asset Management, said foreigners’ relocating a significant portion of their investments from the country’s equity market was another reason behind the low valuation of Square Pharma.
He also thinks Square Pharma, having a very strong financial base, should distribute higher dividends to shareholders.
Good multinational companies pay more in dividends.
Linde Bangladesh’s highest cash dividend is 4,500 per cent for 2024. Another multinational company Reckitt Benckiser (Bangladesh), having the most expensive stock on the DSE, paid record cash dividends at a rate of 1,650 per cent for 2021.
On the other hand, Square Pharma’s highest cash dividend was 110 per cent for FY24. Alongside cash dividends, it issued 5-40 per cent bonus shares between FY2003 and FY20.
However, multinational companies pay high dividends because foreign sponsor-directors have a majority stake in the organizations and so cash dividend is the way they get returns from their investments.
Another reason behind the high valuation of such companies is their limited free floats.
For example, Unilever Consumer Care has 7.2 per cent free float shares, while Marico Bangladesh’s 10 per cent shares are tradable in the equity market and Berger Paints’ 5 per cent.
Even with the market matrix carefully analyzed, Tanay Kumar Roy, head of equity research at IDLC Securities, said Square Pharma’s stock price returns fail to show its business growth. thefinancialexpress.com.bd
