Course and Section: FIN 440.7 Semester: FALL 2013

Date of Submission: 3rd January, 2014

ID# 1120212030

1120240030

1120083030

1130047030

Assignment #4 Company Valuation

Bangladesh cement industry is the 40th largest market in the world. There are as many as 130 cement companies in the country and daily production capacity is about 16.687 million MT. Average revenue per year from this industry is almost ৳ 9060/- million. For the purpose of this assignment, we have chosen cement industry. Among the multinational cement companies Heidelberg Cement Ltd. and Lafarge Surma Cement Ltd. are mentionable whereas Crown Cement and Meghna Cement Ltd. are some big cement companies in Bangladesh. The main purpose of this assignment is to calculate the valuation of the selected companies. We have chosen 3 years time period e.g. 2010, 2011 and 2012 for all the four companies. Different ratios have been calculated based on the companies’ financial statement data. Book value, true value and market value of each company have been calculated. Also WACC of each company has been calculated. Risk based on returns for each company has been analyzed over the periods through variance, standard deviation, and coefficient of variance. Finally industry average has been calculated and performance of each company has been analyzed based on industry average values.

HEIDELBERG CEMENT BANGLADESH LTD. Heidelberg Cement Bangladesh Ltd. is a member of Heidelberg Cement Group,

Germany. Ruby Cement and Scan Cement are two reputed brands of the company. The production plants of the company are located in Dhaka and Chittagong. In Bangladesh this company is one of the largest foreign investors having an investment of about US$ 100 million. More than 300 employees are working round the clock to materialize the mission of this great global company. The company was listed in Dhaka Stock Exchange (DSE) in year 2003.

RATIOS

Fiscal Years 2010 2011 2012 Average x

Standard Deviation б =

√∑i=1

n

(xi−x )2

n−1

Coefficient of Variance, CV =

бx

Liquidity Ratio

NWC = CA – CL (In BDT)

2,597,842,000 2,421,622,000 3,506,526,000 2,841,996,667 582,205,117 0.20

Productivity Ratio

FATOR 3.08 × 2.45 × 3.08 × 2.87 × 0.36 × 0.12

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TATOR 1.16 × 1.06 × 1.18 × 1.13 × 0.06 × 0.05

Leverage Ratio

TIE Ratio 5% 2.9% 5.2% 4.37% 1.27% 0.29

Efficiency Ratio

ROA 0.14 × 0.09 × 0.14 × 0.12 × 0.03 × 0.24

ROE 0.22 × 0.14 × 0.20 × 0.19 × 0.04 × 0.22

Operating Margin 18% 10.2% 14.3% 14.17% 3.90% 0.27

Valuation Ratios

Dividend Payout Ratio

18.00% 28.20% 17.20% 21.13% 6.13% 0.29

Plowback Ratio (PBR) 82.00% 71.80% 82.80% 78.87% 6.13% 0.07

Cash Conversion Cycle (CCC)

2010 2011 2012 Average x

Inventory Turnover Period (ITP) (Days) 68.58 56.27 48.61 57.82

Days Sales Outstanding (DSO) (Days) 25.49 33.87 30.36 29.91

Days Payable Outstanding (DPO) (Days) 88.11 97.58 77.65 87.78

CCC =[ ITP + DSO – DPO] (Days) 5.96 (7.44) 1.32 (0.05)

So it can be seen that, Heidelberg Cement Ltd. keeps cash on hand for at least some hours due to its average Cash conversion cycle of -0.05 days.

WACC Calculation

2010 2011 2012 Average x

Cost of Debt Kd Calculation

Cost of Debt, Kd = Total Interest Payment

Total Interest Bearing Libility

53.56% 45.02% 37.28% 45.29%

Marginal Tax Rate T (27.50%) 27.50% 27.50% 27.50% 27.50%

After tax cost of debt Kd (1−T ) 38.83% 32.64% 27.03% 32.83%

Weight of DebtW d Calculation

Wd = Total LiabilityTotal Invested Capital

10.53% 11.23% 11.32% 11.03%

Cost of Equity Ke Calculation:

Ke 22.76% 43.17% 5.57% 23.83%

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Weight of Equity We Calculation:

We = Owners' Equity

Total Invested Capital89.47% 88.77% 88.68% 88.97%

WACC = W dK d (1−T )+¿WeKe 24.45% 41.98% 8.00% 24.81%

Calculation of Book Values:

2010 2011 2012

Total Assets 7,182,699,000 8,010,817,000 9,181,511,000

Less: Intangible Asset (669,000) (979,000) (2,251,000)

Less: Total Liabilities (2,881,486,000) (2,747,620,000) (2,426,198,000)

Book Value of Company (In BDT) 4,300,544,000 5,262,218,000 6,753,062,000

Calculation of Market Values:

2010 2011 2012

Market Value of (total interest bearing) debt……(a) 2,426,198,000 2,747,620,000 2,881,486,000

Market Value of equity = Stock price × Shareholder’s Outstanding Shares ……………...(b) 20,676,112,76

314,459,294,271 14,956,526,743

Market value of Company (In BDT)……….…[(a) + (b)] 23,102,310,763

17,206,914,271 17,838,012,743

Calculation of True Value

2010 2011 2012

EBIT × PE Ratio 1,491,991,000 × 20.70 866,910,000 × 19.29 1,556,574,000 × 11.58

True Value (In BDT) 30,884,213,700 16,722,693,900 18,025,126,920

Comparison Between True Value & Market Price

2010 2011 2012

True Value (In BDT) 30,884,213,700 16,722,693,900 18,025,126,920

Share Outstanding (In BDT) 56,503,690 56,503,690 56,503,690

True value/share (In BDT) 546.59 295.96 319.00

Market price/share (In BDT) 365.93 255.90 264.70

Comment Undervalued Undervalued Undervalued

From the above table it is seen that, Heidelberg Cement Limited’s stock price is undervalued in all the three years. Hence it will be profitable to buy more of them.

LAFARGE SURMA CEMENT LTD.

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Lafarge Surma Cement Ltd. (LSC) was incorporated on 11 th November, 1997 as a private limited company in Bangladesh under the Companies Act 1994 having its registered office in Dhaka. On 20th January, 2003 Lafarge Surma Cement Ltd. was made into a public limited company. The Company is listed in Dhaka and Chittagong Stock Exchange. Today, Lafarge Surma Cement Ltd. has more than 20,000 shareholders.  The Company is already meeting about 8% of the total market need for cement and 10% of total clinker requirements of Bangladesh market whereas they continue to enjoy strong growth rates. By supplying clinker to other cement producers in the market, they contribute some US$ 50~60 million per annum worth of foreign currency savings for the country. They contribute around BDT 1 (one) billion per annum as government revenue to the national exchequer of Bangladesh. About 5,000 people depend on their business directly or indirectly for their livelihood. 

RATIOS

Fiscal Years

2010 2011 2012 Average x

Standard Deviation б =

√∑i=1

n

(xi−x )2

n−1

Coefficient of

Variance,

CV = бx

Liquidity Ratio

NWC = CA – CL (In BDT)

(7,886,006,000.00)

(4,657,891,000.00) (4,477,112,000.00)

(5,673,669,666.67) 1,918,070,463

(0.34)

Productivity Ratio

FATOR 0.36 × 0.40 × 0.73 × 0.50 × 0.20 × 0.41

TATOR 0.32 × 0.33 × 0.57 × 0.41 × 0.14 × 0.35

Leverage Ratio

TIE Ratio (167.48%) 55.71% 402.29% 96.84% 287.10% 2.96

Efficiency Ratio

ROA (0.05 ×) (0.10 ×) (0.10 ×) (0.08 ×) 0.03 × (0.31)

ROE (0.59 ×) (0.34 ×) 0.22 × (0.23 ×) 0.42 × (1.78)

Operating Margin (19.73%) 3.39% 31.35% 5.00% 25.58 % 5.11

Valuation Ratios

Dividend Payout Ratio

0% 0% 0% 0% 0% 0

Plowback Ratio (PBR)

100% 100% 100% 100% 0% 0

Cash Conversion Cycle (CCC)

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2010 2011 2012 Average x

Inventory Turnover Period (ITP) (Days) 81.27 102.24 92.61 92.04

Days Sales Outstanding (DSO) (Days) 8.48 31.49 24.08 21.35

Days Payable Outstanding (DPO) (Days) 103.69 116.25 108.57 109.50

CCC = [ITP + DSO – DPO] (Days) (13.94) 17.48 8.12 3.89So it can be said that, Lafarge Surma Cement Ltd. is out of cash for 3.89 days on an average.

WACC Calculation

2010 2011 2012 Average x

Cost of Debt Kd Calculation

Cost of Debt, Kd = Total Interest Payment

Total Interest Bearing Libility

5.20% 11.47% 11.62% 9.43%

Marginal Tax Rate T (27.50%) 27.50% 27.50% 27.50% 27.50%

After tax cost of debt Kd (1−T ) 3.77% 8.32% 8.43% 6.84%

Weight of DebtW d Calculation

Wd = Total LiabilityTotal Invested Capital

82.50% 47.89% 46.72% 59.04%

Cost of Equity Ke Calculation:

Ke 22.83% 26.41% 4.25% 17.83%

Weight of Equity We Calculation:

We = Owners' Equity

Total Invested Capital17.50% 52.11% 53.28% 40.96%

WACC = W dK d (1−T )+¿WeKe 7.11% 17.74% 6.20% 10.35%

Calculation of Book Values:

2010 2011 2012

Total Assets 17,914,804,000 18,559,381,000 18,523,368,000

Less: Intangible Asset (1,219,360,000) (1,293,051,000) (1,185,810,000)

Less: Total Liabilities (15,146,325,000) (12,107,398,000) (7,134,806,000)

Book Value of Company (In BDT) 1,549,119,000 5,158,932,000 10,202,752,000

Calculation of Market Value:

2010 2011 2012

Market Value of (total interest bearing) debt…………………………………………….(a) 13,045,189,000 8,282,622,000 7,134,806,000

Market Value of equity = Stock price × 327,362,183,50 15,446,268,880 19,104,595,720

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Shareholder’s Outstanding Shares …………….(b)0

Market value of Company (In BDT)………...[(a) + (b)] 340,407,372,500

23,728,890,880 26,239,401,720

Calculation of True Value

2010 2011 2012

EBIT × PE Ratio (1,115,871,000) × (199.80) 206,884,000 × (7.06) 3,336,088,000 × 10.51

True Value (In BDT) 222,951,025,800 1,460,601,040 35,062,284,880

Comparison Between True Value & Market Price

2010 2011 2012

True Value (In BDT) (22,295,1025,800) 1,460,601,040 35,066,284,880

Share Outstanding 580,686,800 580,686,800 580,686,800

True value/share (In BDT) (383.94) 2.51 60.39

Market price/share (In BDT) 563.75 26.60 32.90

Comment Overvalued Overvalued Undervalued

From the investors’ standpoint, it is not profitable to buy the shares of the company when they are overvalued, but they can make some profit when they are undervalued

MEGHNA CEMENT LTD.

Meghna Cement Ltd. (MCL) is the first manufacturing unit of Bashundhara Group and it is one of the largest cement industries in the country producing nearly 1 MT a year. The Meghna Cement Mills Ltd. is an International Standard Organization (ISO 9001: 2008) certified company having accreditation of manufacturing products for domestic and international markets. The company is listed in both Dhaka and Chittagong Stock Exchange, the two bourses of the country since 1995 and 1996 respectively. The company markets its product under the registered trademark “King Brand Cement”.

RATIOS

Fiscal Years 2010 2011 2012 Average x

Standard Deviation б =

√∑i=1

n

(xi−x )2

n−1

Coefficient of Variance, CV =

бx

Liquidity Ratio

NWC = CA – CL (In BDT)

439,465,000 477,137,000 527,210,000 481,270,666.7 44,018,310.47 0.09

Productivity Ratio

FATOR 3.60 × 3.68 × 4.62 × 3.97 × 0.57 × 0.14

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TATOR 1.22 × 1.28 × 1.18 × 1.22 × 0.05 × 0.04

Leverage Ratio

TIE Ratio 410% 270% 191% 290.33% 1.11% 0.38

Efficiency Ratio

ROA 0.03 × 0.03 × 0.03 × 0.03 × 0.003 × 0.09

ROE 0.18 × 0.14 × 0.16 × 0.16 × 0.02 × 0.13

Operating Margin 3.80% 2.82% 2.68% 3.10% 0.006% 0.20

Valuation Ratios

Dividend Payout Ratio

46.30% 56.28% 48.06% 50.21 % 0.05% 0.11

Plowback Ratio (PBR) 53.70% 43.72% 51.94% 49.79% 5.33% 0.11

Cash Conversion Cycle (CCC)

2010 2011 2012 Average x

Inventory Turnover Period (ITP) (Days) 61.48 45.98 38.09 48.52

Days Sales Outstanding (DSO) (Days) 35.18 8.07 56.97 33.40

Days Payable Outstanding (DPO) (Days) 46.54 37.80 36.81 40.38

CCC = [ITP + DSO – DPO] (Days) 50.12 52.78 58.25 53.72

From the above table it is seen that, Meghna Cement Ltd. is out of cash for more than 53 days on an average.

WACC Calculation

2010 2011 2012 Average x

Cost of Debt Kd Calculation

Cost of Debt, Kd= Total Interest Payment

Total Interest Bearing Libility2.65% 3.62% 6.60% 4.29%

Marginal Tax Rate T (27.50%) 27.50% 27.50% 27.50% 27.50%

After tax cost of debt Kd (1−T ) 1.92% 2.62% 4.78% 3.10%

Weight of DebtW d Calculation

Wd= Total Liability

Total Invested Capital87.40% 93.60% 93.50% 91.5%

Cost of Equity Ke Calculation:

Ke 9.71% 6.12% 8.27% 8.03%

Weight of Equity We Calculation:

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We = Owners' Equity

Total Invested Capital12.60% 6.70% 6.50% 8.60%

WACC = W dK d (1−T )+¿WeKe 2.90% 2.86% 5.00% 3.58%

Calculation of Book Values:

2010 2011 2012

Total Assets 3,610,766,000 3,550,277,000 4,171,434,000

Less: Intangible Asset (0) (0) (0)

Less: Total Liabilities (2,563,431,000) (2,835,214,000) (3,104,511,000)

Book Value of Company (In BDT) 1,047,335,000 715,060,000 1,066,923,000

Calculation of Market Values:

2010 2011 2012

Market Value of (total interest bearing) debt……(a) 2,045,545,000 2,606,781,000 2,492,577,000

Market Value of equity = Stock price × Shareholder’s Outstanding Shares ……………...(b) 7,596,135,040 3,141,055,840 2,358,041,920

Market value of Company (In BDT) .………[(a) + (b)] 9,641,680,040 5,747,836,840 4,850,618,920

Calculation of True Value

2010 2011 2012

EBIT × PE Ratio 203,518,000 × 31.43 222,980,000 × 62.51 295,124,000 × 20.15

True Value (In BDT) 6,396,570,740 1,3938,479,800 5,946,748,600

Comparison Between True Value & Market Price

2010 2011 2012

True Value (In BDT) 6,396,570,740 1,3938,479,800 5,946,748,600

Share Outstanding 22,500,400 22,500,400 22,500,400

True value/share (In BDT) 284.29 619.48 264.30

Market price/share (In BDT) 337.60 139.60 104.80

Comment Overvalued Undervalued Undervalued

From the investors’ standpoint, it is not profitable to buy the shares of the company when they are overvalued, but they can make some profit when they are undervalued

CROWN CEMENT LTD.

M. I. Cement (CROWN) Factory Ltd. is a public limited company and one of the leading manufacturers of cement in Bangladesh. On December 31, 1994 it started its journey with the commitment for providing high quality cement to the country. With the passing of time the demand of Crown Cement increased. Therefore the sponsors expanded the project

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thrice. By dint of quality Crown Cement soon gained acceptability both at home and abroad which raised the necessity for expanding the plant.

RATIOS

Fiscal Years 2010 2011 2012 Average x

Standard Deviation б =

√∑i=1

n

(xi−x )2

n−1

Coefficient of Variance, CV

= бx

Liquidity Ratio

NWC = CA – CL (In BDT)

253,440,971 3,383,041,300 245,195,296 1,293,892,522 1,809,260,611 1.39

Productivity Ratio

FATOR 2.73 × 1.80 × 1.36 × 1.96 × 0.70 × 0.35

TATOR 1.37 × 0.57 × 0.57 × 0.83 × 0.46 × 0.55

Leverage Ratio

TIE Ratio 12.18% 6.37% 3.23% 7.26% 4.54% 0.62

Efficiency Ratio

ROA 0.14 × 0.06 × 0.05 × 0.08 × 0.05 × 0.62

ROE 0.25 × 0.08 × 0.10 × 0.14 × 0.09 × 0.64

Operating Margin 15% 11% 18% 14% 4% 0.28

Valuation Ratio

Dividend Payout Ratio

0% 0% 26.00% 8.66% 15.01% 1.73

Plowback Ratio (PBR) 100.00% 100.00% 74.00% 91.33% 15.01% 0.16

Cash Conversion Cycle (CCC)

2010 2011 2012 Average x

Inventory Turnover Period (Days) 52 65 33 50

Days Sales Outstanding (Days) 36 30 48 38

Days Payable Outstanding (Days) 53 12 11 25.33

CCC = ITP + DSO – DPO (Days) 35 83 70 62.67

Cash Conversion Cycle on an average is 63 days for CROWN cement which means that, the company does not have the money in hand for 63 days in a year.

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WACC Calculation

2010 2011 2012 Average x

Cost of Debt Kd Calculation

Cost of Debt, Kd = Total Interest Payment

Total Interest Bearing Libility

20.41% 7.32% 6.02% 11.25%

Marginal Tax Rate T (27.50%) 27.50% 27.50% 27.50% 27.50%

After tax cost of debt Kd (1−T ) 14.8% 4.65% 3.82% 7.76%

Weight of DebtW d Calculation

Wd = Total interest bearing Liability

Total Liability20.18% 58.06% 77.00% 51.70%

Cost of Equity Ke Calculation:

Ke 27.33% 30.53% 1.68% 19.8%

Weight of Equity We Calculation:

We = Owners' Equity

Total Invested Capital79.82% 41.90% 23.00% 48.28%

WACC = W dK d (1−T )+¿WeKe 24.8% 15.49% 3.33% 14.54%

Calculation of Book Values:

2010 2011 2012

Total Assets 2,282,435,892 7,004,458,502 9,915,183,783

Less: Intangible Asset (0) (0) (0)

Less: Total Liabilities (946,438,009) (1,975,964,799) (4,477,224,213)

Book Value of Company (In BDT) 1,335,997,883 5,028,493,703 5,437,959,570

Calculation of Market Values:

2010 2011 2012

Market value of (total interest bearing) debt…...(a) 996,438,009 1,975,964,799 4,477,224,213

Market value of equity = Stock price × Shareholder’s Outstanding Shares……………..(b) 16,580,025,00

010,297,556,200 13,176,000,000

Market value of company (In BDT)………..[(a)+(b)] 17,576,463,009

12,273,520,999 17,653,224,213

Calculation of True Value

2010 2011 2012

EBIT × PE Ratio 570,930,007 × 49.92 60,6013,786 × 43.13 574,892,238 × 25.7

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True Value (In BDT) 28,500,825,950 26,137,274,590 14,774,730,520

Comparison Between True Value & Market Value

2010 2011 2012

True Value (In BDT) 28,500,825,950 26,137,274,590 14,774,730,520

Share Outstanding 100,000,000 100,000,000 135,000,000

True value/share (In BDT) 285.00 261.37 109.44

Market price/share (In BDT) 101.6 126.6 97.10

Comment Undervalued Undervalued Undervalued

Stocks of three years are undervalued. So it’s better to buy more of it.

INDUSTRY ANALYSIS

Companies Heidelberg Cement Ltd.

Lafarge Surma Cement Ltd. Meghna Cement Ltd.

Crown Cement Bangladesh Ltd. Average x

Liquidity Ratio

NWC = CA – CL (In BDT)

2,841,996,667 (5,673,669,666.67) 481,270,666.7 1,293,892,522 93,725,297.58

Productivity Ratio

FATOR 2.87 × 0.50 × 3.97 × 1.96 × 2.32 ×

TATOR 1.13 × 0.41 × 1.22 × 0.83 × 0.90 ×

Leverage Ratio

TIE Ratio 4.37% 96.84% 290.33% 7.26% 99.70%

Efficiency Ratio

ROA 0.12 × (0.08 ×) 0.0307× 0.08 × 0.04 ×

ROE 0.19 × (0.23 ×) 0.1598 × 0.14 × 0.06 ×

Operating Margin 14.17% 5.00% 3.1% 14% 9.1%

Valuation Ratio

Dividend Payout Ratio

21.13% 0% 50.21 % 8.66% 20%

Plowback Ratio (PBR)

78.87% 100% 178.33% 91.34% 80%

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Cash Conversion Cycle (CCC)

Heidelberg Cement Ltd.

Lafarge Surma Cement Ltd.

Meghna Cement Ltd.

Crown Cement Bangladesh Ltd.

Average x

Inventory Turnover Period (Days) 57.82 92.04 48.52 50 62.095

Days Sales Outstanding (Days) 29.91 21.35 33.40 38 30.66

Days Payable Outstanding (Days) 87.78 109.50 40.38 25.33 65.75

CCC = ITP + DSO – DPO (Days) (0.05) 3.89 53.72 62.67 30.06

Comparison between book value, market value and true value of each company:

Book values of all the companies have been calculated by deducting intangible assets and total liabilities from total assets. Market value of each of the four companies is the summation of market value of both debt and equity where market value of equity is the product of total number of shares outstanding and market price of that particular company. The True Value of a company is product of operating income (EBIT) and PE ratio. As different methods were applied to calculate the values, there exist differences between book value, market value and true value of each of the four companies.

Company performance Analysis based on industry averages:

Heidelberg Cement Ltd.:From the above table of Industry Analysis, it is apparent that Heidelberg Cement Ltd. is

in a better position than its competitors. According to its negative average cash conversion cycle, it is the only company among the four companies which is keeping cash in hand. The company’s FATOR and TATOR values are substantially higher than industry average. The company’s efficiency ratios are also higher than industry averages. Its only weakness is significantly low value of TIE ratio, which depicts the company’s too much dependency on debt financing. Valuation ratios are almost similar to industry averages.

Lafarge Surma Cement Ltd.:From the above table of Industry Analysis, it is apparent that Lafarge Surma Cement Ltd.

is a company with negative NWC. It resulted due to their slow collection and inadequate increase in inventory. As the company owns up a significant amount of assets, the company’s FATOR and TATOR values are substantially lower than industry average. The company’s efficiency ratios are also negative which resulted from the net loss of the company. One positive thing is that the company’s value of TIE ratio; it is significantly high as the company has less debt financing.

Meghna Cement Ltd.:

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Meghna Cement Limited’s main positive point is its TIE ratio. Its TIE ratio is better than the other companies. This means the company’s EBIT is way more than the interest expense on an average. Its CCC is on the higher side, 54 days, which means it does not have cash in hand for 54 days. Its FATOR is higher than other three companies which mean the company’s fixed assets are turned into sales in a quicker succession than its competitors.

Crown Cement Ltd.Well it s clearly seen that Heidelberg is in better position than its competitors. On the

other hand, Crown Cement Limited’s condition is worse than the other three companies. It has the highest CCC of 62.67 days which means it does not have cash in hand for almost 63 days. Moreover its FATOR is less than the other three companies whereas only TATOR ratio is higher than Lafarge Surma Cement Ltd. So on an average the company is in need of more concentration to get on to the profit.

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