Brokers recommend subscription of BPPL, IPO opening today

Several brokers have recommended subscription to BPPL Holdings Ltd’s IPO of Rs. 12 per share official opening of which is today.

“We value the company at Rs. 4,092 million resulting in per share valuation of Rs. 13.34. Since the issue price is at a discount to the valuation, we recommend to ‘Subscribe’ for the issue,” said LOLC Securities. 

First Capital Research said “The PER of BPPL is less than its peer group except REXP.  Furthermore the PBV is below that of REXP and TJL. Accordingly, the counter will have potential upside value, share value wise, at an issue price of Rs. 12.”

According to the Financial Advisors and Managers to the Issue CT CLSA Capital, the IPO is attractively priced at a Price to Earnings Ratio (PER) of 8.5x for FY17E and 7.1x for FY18E, at a discount to the listed industry peers and broader market. The issue price of Rs. 12 is at a 17.0% discount to the fair value of Rs. 14.47.

The Net Asset Value per Share (NAVPS) of BPPL as at 31 March 2016 was Rs. 5.54 (A Sub Division of Shares in the ratio of 55:1 was carried out in January 2016 and a capitalisation of reserves in the ratio of 1:191 was carried out in August 2016; NAVPS is calculated using the post share-split and capitalisation of reserves number of shares for comparative purposes throughout the document). This translates into a Price to Book Value (PBV) of 2.15x, based on the Issue Price. The NAVPS of BPPL as at 31 December 2016 was Rs. 6.33. This translates into a PBV of 1.90x based on the Issue Price.

BPPL, one of the largest backwardly integrated brush manufacturers not only locally but in South-East Asia, is offering 10% stake or 30.685 million shares at Rs. 12 each.

LOLC Securities said with inception in 1991, BPPL has been growing as a brush manufacture and exporter taping mainly US market. While the company is baked by long standing customers, it will be a net forex earner on rupee depreciation, strengthening its bottom-line. Amid high competition, BPPL has been leveraging its innovative edge by entering to new products and markets resulting a potential upside for existing business case while diverting the risk of depending on a single market. With positive macro-economic drivers, we expect company to perform steadily while its sound balance sheet to support for future funding options without putting pressure on shareholders.

Strong business ties and price inelasticity to generate a steady topline: BPPL will continue to enjoy steady demand from its existing customers based on well-established relationships, cushioning intense competition. Given geopolitical and economic prospects to be positive, we expect US remains to be the key market with estimated ~13% total revenue CAGR for next 5 years despite concentration risk. The relative inelastic demand specially in US and Europe will also augur well to record a stable topline.

Net benefit on rupee depreciation offsetting corporate tax hike: Company being a net forex earner (95% revenue and 30% CoS in USD), we expect company to benefit on continuous rupee depreciation while offsetting the impact of corporate tax hike to 14%.

Synthetic yarn, untapped market: There is a large untapped local market for synthetic yarn and BBPL could conveniently leverage their ‘know how’ and strong links with apparel players to cater the demand which is now depending on imports. However, it will be in operation since 2019 and thus it is still early stage to factor earnings forecast in fundamental valuations.

Highlighting sound dividend payout, LOLC Securities said “We expect company to continue with 35%-40% dividend payout for next 5 years, benefiting investors.”

 It has separately valued the brush business and synthetic yarn project in deriving a value for BPPL. LOLC Securities has used a Cost of Equity of 17.15%. “We expect BPPL’s brush business to record a steady earnings growth with a further uptick from new markets unless there will be a severe negative outlook in US under Trump Administration. It is still early stage to materialize earnings from Yarn project into a fundamental valuation and thus we have used estimated PBV multiple of 1.8X on expected equity infusion of Rs. 175 million,’ the broking firm added.

First Capital Research said BPPL’s strategy for brushes focuses on growth at steady levels in

the professional cleaning industry while increasing focus on the household cleaning market through direct and branded brushes. The company also plans on building an Asian brand with focus on the South East Asian markets.

Currently BPPL has launched “Tip Top” brand in Sri Lanka and “Jab” brand in Indonesia, and has plans to launch another brand in Malaysia in April 2018.

Furthermore BPPL plans to invest approximately LKR 675Mn in a synthetic yarn project through FY17-18. The funding for this project will be through a USD denominated loan worth approximately Rs. 500Mn and through internally generated funds of about Rs. 175Mn.

The company will also invest Rs. 50Mn each in FY17-18 for two bio mass power plants. The total cost savings is estimated at Rs. 20Mn per year.