Should you convert Beximco Sukuk into equity?

Beximco Green Sukuk unitholders have been offered with Beximco Ltd shares against up to 20% of their Sukuk investments at the end of the first year of the largest corporate Sukuk in the country.

The most common question among Sukuk investors seems to be if the conversion will be profitable for them.

"Mathematically speaking, the answer is yes," said bond expert Ershad Hossain, the managing director of City Bank Capital Resources Ltd that worked as the issue manager and arranger of the Tk3,000 crore five-year Sukuk issued in December last year.

As mentioned in the Sukuk prospectus, Sukuk holders may exercise their right to convert 5% or 10% or 15% or 20% Sukuk in a year into Beximco Ltd shares at a price one-fourth less than the twenty-day market average of the conglomerate's shares in the bourse.

Explaining the maths, Ershad Hossain said, assuming the floor price of Tk115.6 where Beximco stock is stuck nowadays the reference price average, a Sukuk holder would get Beximco shares at Tk86.7.

If Sukuk holders opt for converting all the one-fifth eligible Sukuk units this year, the number of Beximco shares would increase by around 7.9% and the company's assets and profits would be divided among the higher number of shares.

On the other hand, if majority unit holders, mostly banks, prefer their double-digit fixed income from Sukuk, the company would issue much less new shares and there would be less dilution of company assets and earnings.  

Bourses make downward adjustment of stock prices in proportion to the increase in a company's number of shares.

"Whatever happens, I see at least 15 percentage point discount on the table for the new shares," said Hossain, adding that the less Sukuk holders would prefer converting into equity for this year the more the discount would be.

The floor price problem

One thing appeared to be clouding analysts' calculation – the floor price on individual scrips in the bourses of Dhaka and Chattogram that came at the end of July this year and is not allowing prices to go below the floor.

Over 60% listed scrips including Beximco are stuck on floor prices as no buyer is interested at the current price.

"Floor price hinders the price discovery in the secondary market," said Ershad Hossain, adding, "My calculation is based on the current price at floor and what the secondary market will do after floor price withdrawal is unknown to all."

"If the market is ready to buy your Beximco stock at higher prices later, you will definitely win and you will incur no loss until the stock price goes below your conversion rate."

Also, floor price is a concern for the stock investors who want to sell their shares, but see no buyer at existing price.

Impact of Sukuk on existing Beximco shareholders

As dilution reduces profit and asset value per share, equity analysts are watchful of the developments in terms of if the company can retain its profits growth to offset the dilution, especially following the dropped profitability in the tough April-June quarter this year.  

In fact, the flying Beximco stock nosedived into the floor at the end of October due to the 65% year on year decline in profits for the last quarter of the fiscal year which, however, saw 90% annual growth due to the even higher growth in the previous quarters.

Beximco Group Vice Chairman Salman F Rahman in March, 2021 told The Business Standard he was confident about the company's revenue and profits boost by the Sukuk-financed projects — two solar power projects at North Bengal and the green textile manufacturing unit — would surpass the company's cost of Sukuk or the dilution impact on shareholders.

Rahman on Wednesday told The Business Standard that the solar plants would begin operations in December to help the country save around $100mn fuel import bills a year and offer the company a decent return on investment.

A leading brokerage firm's note to clients highlighted that the two solar power plants are likely to add around Tk700 crore to Beximco's annual revenue and after all the maintenance and finance cost the company would retain two thirds of the income as profits.

The solar units alone are capable of boosting Beximco profits by one third after December this year, said an analyst of the firm who requested anonymity.

He, however, was yet to conclude about the potential impact of the green textile investment Beximco planned during Sukuk issuance a year ago.

Salman F Rahman said on Wednesday "We have heavily invested in sustainable textile and the export potential of sustainably manufactured clothes is much higher, even if the global apparel demand is little subdued right now."
Interested Beximco Sukuk holders are requested to apply for the conversion by 7 December, while the record date to identify Sukuk holders will be 22 December.

Beximco Sukuk having a face value of Tk100 each closed at TK88.5 in the Dhaka Stock Exchange on Wednesday, while Beximco shares with their face value of Tk10 apiece closed at Tk115.6.