BLX - Bladex: A Speculative LatAm Play With Growth Value And Momentum

2023-08-11 10:13:06 ET

Summary

• Bladex's revenue, net income, and FCF are at or near record highs since 2014.
• Valuation multiples such as P/E, P/S, and P/B are near the bottom of their post-2014 ranges.
• Deposits recently hit a record high and became a larger fraction of Bladex's total funding, and the firm expects this trend to continue.
• Despite risks including an elevated exposure to the oil and gas sector and a geographically concentrated base of borrowers, Bladex’s strong financials, low multiples, and upward price momentum present an interesting opportunity for investors.

About

Banco Latinoamericano de Comercio Exterior, S. A. ( BLX ) provides banking services such as short- and medium-term loan origination, structured credits, and financial guarantee contracts in Latin America. The firm is incorporated under the laws of the Republic of Panama, and its customers include corporations, financial institutions and investors. As its FY2022 20-F explains:

Bladex participates… through two business segments. The Commercial Business Segment encompasses the Bank’s core business of financial intermediation and fee generating activities… The Treasury Business Segment focuses on managing the Bank’s Investment Portfolio, and the overall structure of its assets and liabilities to achieve more efficient funding and liquidity positions…

Historically, trade finance has been afforded favorable treatment in the context of debt restructurings of Latin American borrowers. The Bank believes… its focus on trade finance and the composition of its Class A shareholders has been instrumental in obtaining certain exceptions regarding U.S. dollar convertibility and transfer limitations imposed on the servicing of external obligations, or preferred creditor status.

Bladex was originally established by the central banks of countries in Latin America and the Caribbean as part of an effort to encourage more economic activity and foreign trade. The firm’s commercial portfolio amounted to $7.7b at FY2022’s end, an 18% rise compared to its value last year.

Strong Financials

The firm’s revenue, net income, and FCF (LTM) are all at or near record highs since 2014, according to data from StockRow .

Bladex’s gross, net, and FCF margins (LTM) are healthy compared to historical levels but have room to improve, now sitting at 39%, 24% and 207%, respectively.

The firm’s leverage ratios, such as debt/equity and debt/assets (quarterly), are elevated relative to their historical ranges and have been in long-term uptrends. The number of common shares dropped ~8.3% compared to two years ago, as of FY2022’s end.

Attractive Valuations

The firm’s P/E, P/S, and P/B (quarterly) are near the bottom of their post-2014 ranges. Its P/B is below 1.0 (~0.7).

Potential Catalysts

In the most recent quarter, deposits hit a record high and became a larger fraction of Bladex’s total funding, rising from 42% last year to 49%; management believes the fraction of funding from deposits will continue to trend upward, according to the Q2-2023 earnings transcript . Bladex also saw a record-breaking 52% YoY rise in fee income this quarter. The firm reached another milestone recently, issuing medium-term debt in Panama for the first time.

Bladex’s commercial portfolio grew 7% YoY, partially thanks to an increase in clients. Management says this portfolio has higher turnover and an average duration of about 12 months. Around 60% of the portfolio matures quarterly. It also has geographical diversification, since it provides exposure to countries such as Brazil, Mexico, Colombia, and Peru.

Elevated interest rates have positively impacted the firm’s net interest income ((NII)), in management’s view. It’s plausible that rates could remain elevated or even rise further, and both outcomes could be favorable to the firm’s NII.

Company insiders own ~24% of shares, per finviz and StockRow , which increases their “skin in the game” and, in theory, further incentivizes decisions that benefit the company’s share price.

Risks

Bladex has a geographically concentrated base of borrowers, with Brazil, Mexico, Guatemala, and Colombia accounting for 13%, 11%, 9%, and 8% of the firm’s total credit portfolio respectively, per the firm’s FY2022 20-F .

A large portion of the firm’s loan portfolio includes customers in the oil and gas and agribusiness industries, accounting for 18% and 5% of the firm’s total loan portfolio, respectively, as of FY2022’s end. Those customers face unique risks including commodity price volatility, public health threats (including COVID-19), and adverse weather events, any of which could cause borrowers to be more likely to default and increase the fraction of the firm’s non-performing loans.

Bladex’s results depend on how risky Panama is perceived by international regulatory bodies. The country is, and previously was (2014-2016), on the “grey” list provided by the Financial Action Task Force (FATF). The FATF reiterated concerns in 2022 and highlighted Panama’s lack of enforcement of laws prohibiting money laundering, proliferation financing, and terrorist financing. Since then, the country has taken remediation steps and expects to be removed from the list in October of this year, per Reuters .

A downgrade in Bladex’s credit rating could lead to heightened funding costs and liquidity risk, potentially causing the firm’s financial performance to deteriorate. According to the company website , S&P ( noted here ), Moody’s, and Fitch ( noted here ) assign a BBB and/or a Baa2 rating to Bladex’s long-term debt. Among that group, Moody’s is unique in describing the outlook for the debt as “negative,” as opposed to “stable,” per Cbonds .

Bladex is particularly exposed to inflationary pressures which, in the firm’s view, have accelerated since 2022 and are partially driven by labor shortages and supply chain issues. If these pressures worsen, economic growth in the countries that Bladex’s borrowers operate in could stagnate, increasing the risk that borrowers are unable to repay.

Like all firms engaged in banking, general macroeconomic conditions, especially interest rates and inflation, play a large role in Bladex’s financial results. If economic activity drops or credit markets become tighter in the future, Bladex’s margins and growth may suffer.

Execution

Buying a stock is a bet on where its price goes, not necessarily the fundamentals of the business. Since there is statistical evidence of trends in equity markets, investors who apply a scientific mindset may benefit from focusing on companies with trending share prices.

Bladex’s share price recently started an uptrend in October of 2022 and is up ~77% since. The stock broke above its 200-day average (a popular trend indicator) in late October, per finviz .

Zooming out, the stock is 17% below its 2017 peak and ~30% below its peak back in late 2014.

It may be sensible to consider a bet on this stock only while the uptrend remains in play, perhaps by requiring that a simple trend signal is active; for example, requiring that the price be above its rolling average (30, 50, 100, 200-day, whichever has stronger evidence).

Bottom Line

Bladex’s record revenue and earnings, depressed valuation multiples, recent increase in clients, and trending share price make it an interesting opportunity for investors. While its price continues to trend, the stock could be a reasonable bet for investors with a momentum-inspired strategy to consider.

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