Time to ride on BML !

I know riding on stocks is the furthest thing that comes to your mind when it comes to investment. With few shares to invest and much chaos on the process of buying, you would rather leave your earnings under the pillow; the perfect safe invented by our great grand fathers. You wouldn’t care about the invisible man that steals your money everyday. The evil and the powerful man………… yes …inflation!!!

Yet what we have been doing is opposing with the rational economic behaviour of self-centered man. What I feel is that we have little information on our investment opportunities. So why not consider some of the alternatives we have? For a head start, I attempted to do a little bit of analysis on the new offering of BML which constitute 490000 ordinary shares of $50 at a rate of $143 offered to the general public. The opportunity is hanging there till 19th August 07. We still have time to decide on its viability.

Looking at the Earnings Per Share and dividend pay-out in figure 1, one would say the company has been performing well. Especially within the last couple of years. Share performance in figure 2 shows the same robustness. But don’t get carried away. What you see may sometimes trick your eyes. So some serious math would be required before getting into conclusion.

First, let’s see if the company’s net assets really worth the premium we are paying.
At the year end of 2006, BML had Total Net Assets worth MRf 644,758,794. This is Mrf 147.14 per share after the share split and bonus issue. Quite a satisfactory figure I must say. I would actually pay the premium even if the NA (net assets) per share falls below Mrf 143. The reason is the option characteristics embedded with the shares. Little beyond this article. However you can find the same rationality when investors pay for common stock of companies with higher liability than asset.

Now let’s attach a mathematical figure for the dividend growth and capital growth. I used arithmetic model rather than the logarithmic model and derived an average dividend growth of 16.68% from the last 5 year figures. Note pointing, however, the figure is pushed up much from the last year dividend which had a 50% increase. The crucial question is whether we consider this as an abnormal dividend and leave out of our model, something I thought as not so wise. Why? Well the fundamental of the market suggest that the company can pursue paying such higher dividends every now and then. As a matter of fact, banking sector is experiencing high growth. BML has been doing some serious investment. As a result the earnings are rising fast and the future looks bright. The share of its non-interest component has been increasing. We can expect a boom anytime in the future. Let it be from the credit cards or mobile banking. There is everything to gain from the tech savvy youngsters.

Using the earliest available share prices up until the share split and bonus issue and using the same arithmetic model, I derived an average capital growth of 32.43% per annum. Again, a figure quite good enough for investment.

So altogether, from above two components, we can make a rough prediction on how our investment in BML shares can grow. This is illustrated in figure 2. The bottom line is that we can get all our investment money back through dividends in 4 years time and we can then sell the share at a profit of nearly Mrf 460; a near return of 82% per annum. A hell of a good investment it seems.

May be I’m little optimistic compared to you on this. But I’m not kidding. BML new offering is really worth looking at!!!! See if you can derive the same conclusions as mine. Don’t rush. But if you do, remember the following points.

• The analysis above is no way enough and does not provide a substitute for financial advice.
• No comparison has been done with other investment opportunities out there.
• People’s risk preferences are different, you may need to find yours first.
• Variance is not included in above analysis.
• Diversification is always good.
• The article does not consider any ethical issues.