Stock Valuation & Analysis

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Introduction

This term paper is prepared with an intention to meet the partial requirement of the course

Securities Analysis and Portfolio Management (FIN 423). We have chosen “Square Textiles,

ASKML & HR Textiles Ltd.” for this purpose. The have figured out the intrinsic value of these

organization’s through constant growth model and matched it with the market price of its

shares. Later on, we discussed and internally compared the reasons for which the market price

of these organization’s shares are higher than our calculated intrinsic value.

Objective of the Study:

The objective of this term paper is to get familiarize with the real market situation and compare

it with the theoretical concepts. The main objective of this term paper is to evaluate the

valuation of the stocks of Square Textiles, ASKML and HR Textiles Ltd. In addition, the term

paper seeks to achieve the following objectives:

1. To find out the intrinsic value of the shares of the organizations.

2. To compare the intrinsic value with the market price of the shares of the organizations.

3. To find out the reasons behind higher market price in comparison to the intrinsic value.

Methodology of the Study:

Mostly we have collected data from secondary sources to conduct the analysis of this term

paper. Some of the secondary sources that we have used is give below:

1. Annual Report of Square Textiles for the year 2009 and 2012.

2. Annual Report of ASKML for the year 2009, 2012 and 2013.

3. Annual Report of HR Textiles for the year 2009 and 2012.

4. Different articles and journals.

5. Different websites which includes the Dhaka Stock Exchange (DSE) and Stock Bangladesh

website.

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Scope of the Study:

1. We were able to know the market price of the shares of Square Textiles, ASKML and HR

Textiles Ltd.

2. We were able to know the amount of dividends that Square Textiles, ASKML and HR

Textiles Ltd. share with their stockholders.

3. We were able to know how to evaluate the intrinsic value in real life of large companies

like Square Textiles, ASKML and HR Textiles Ltd.

4. We were able to know the reasons behind the higher market price Square Textiles, ASKML

and HR Textiles Ltd. in comparison to our calculated intrinsic value.

5. We were able to know different rules and regulations of Dhaka Stock Exchange.

Limitations of the Study:

1. The insufficiency of information is the main constraint of the study.

2. Inexperience and time limitations created some obstacles.

3. Regular class schedule, assignments and examinations of other courses created some

problems.

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Background of the Companies

Square Textiles Ltd:

Square Textiles Ltd was established as a public limited company in 1994 as a group company

in Square group with a business line of manufacturing and marketing of yarn. The company

started its operation on 1997 and was listed at both Dhaka Stock Exchange and in Chittagong

Stock Exchange in 2004. At the end of 2009, paid-up capital of the company was TK.705.84

million with 70,584,053 shares outstanding. The company is very profitable and doing very

good in terms of share price also. Dividend payout in both cash and bonus share has also been

very consistent through the last few years.

Square Textiles Ltd got Oeko-Tex standard 100 and ISO-9002 certification in 2000.

At the end of 2009, the production capacity of the company stands at 11,582,899 Kg Ring yarn

and 12,329,688 Kg of O/E yarn.

Apex Spinning & Knitting Mills Ltd. (ASKML):

APEX Spinning and Knitting Mills Ltd. (ASKML) was incorporated in 1990 as a public limited

company and listed in Dhaka Stock Exchange and in Chittagong Stock Exchange. The

company was initially formed for processing and export of knit garments but now ASKML is

a leading manufacturer and exporter of all kinds of textiles knitting garments.

ASKML is 100% export oriented, vertically integrated knitting, dyeing, finishing and garment

manufacturing company with production capacity of about 15 million pieces of garments per

year. ASKML exports to North America, EU countries and to South East Asia.

ASKML has a desirable reputation as an international garment manufacturer based on a simple

but unwavering philosophy of producing high quality products. All fabrics produced in

ASKML's own factory are tested in its own laboratory for wet & dry-rub fastness, wash

fastness, dimensional stability, required fabric density, yarn count and composition before

making finished garments.

ASKML has permission to put OKO Tex label on all its garments and currently in the middle

of attaining ISO 9001:2000 certification from the accreditation body of UKAS.

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HR Textiles Ltd.:

Pride Group is among the large Bangladesh private sector manufacturing based enterprises,

and H.R. Textile is one of the sister concern of Pride group. H.R. Textile Mills Limited is a

vertical public limited company, engaged in manufacturing of knitwear products. H.R. Textile

Mills Limited is a Lycra assured factory. It is one of the pioneering composite knitwear

factories in Bangladesh. It has a complete North American and European state-of-the-art setup,

thoroughly engineered and is capable of manufacturing a whole range of knit fabrics and

garments.

The group started modestly in 1960 as Dacca Textile Ltd and with prudent entrepreneurship of

its Founder Chairman Alhaz Md. Halimur Rahman. He started Dacca Textile Ltd as a several

types of semi-mechanized industry that means larger types of cottage industry. That time their

activities were only printing Sarees. In 1986, they started their journey with dyeing and design

Sarees for local market. In 1990, they bought knitting machine. Today H.R. Textile is a

renowned vertical textile setup engaged in the manufacture of knitwear products with a goal to

export to the European Union, the USA and Canada. The organization is also engaged in

production and marketing of sarees, kids wear, ladies wear, home furnishing and other textiles

products through a chain retail outlets spread all over Bangladesh. It has a total employee of

around 5000 people. Name of the current chairman of H.R. Textiles is Dr. Muhammad Abdul

Moyeen.

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Valuation & Analysis of the Shares of the Companies

In this part, we have calculated the intrinsic value of Square Textiles, ASKML and HR Textiles

Ltd. Afterwards, we have calculated the market price by averaging the market price of these

companies for last 1 year. Lastly, we discussed about the possible reasons behind the higher

market price of these companies in comparison to our calculated intrinsic value. We have also

compared some of the reasons with our selected companies as assessment between companies

of same industry is more viable and to make our report more authentic.

Constant Values:

Market Return (Rm)

Formula P0 P1 Calculation Value

Rm = {(P1/P0) -1} 4058.65986 4684.07065 Rm = {(4684.07065/4058.65986) -1} Rm = 15.41%

Note:

P0 = Stock Index of 24th February, 2013

P1 = Stock Index of 17th February, 2014

Risk Free Rate (Rf)

5%

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Square Textiles Ltd.

1. Intrinsic Value of the Share:

Growth Rate (g)

Formula PV (2009 Dividend) FV (2013 Dividend) Calculation Value

FV = PV (1+i)5 TK1.60 TK1.85 1.85 = 1.60(1+i)5 i = 3%

Required Rate of Return (Ke)

Formula Rf Rm β Calculation Value

Ke = Rf + (Rm-Rf) * β 5% 15.41% 1.09 Ke = 0.05 + (0.1541 – 0.05) * 1.09 Ke = 16.35%

Intrinsic Value (V)

Formula D0 (2013 Dividend) g Ke Calculation Value

V = [{D0(1+g)}/(Ke-g)] TK 1.85 3% 16.35% V = [{1.85 (1+0.03)}/(0.1635 – 0.03)]

V = TK 14.29

2. Market Price of the Share:

Average Market Price for Last 1 Year

Formula Highest Value Lowest Value Calculation Value

P = {(Highest Price + Lowest Price) / 2} TK 119.30 TK 86.20 P = {(119.30 + 86.20)/2} P = TK 102.75

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Comparison between Intrinsic Value and Average Market Price:

From this graph we can see that there is a significant difference between the intrinsic value and

the average market price of Square Textiles Ltd. We can see that the market price of the share

is TK 102.75 per share which is very much higher than our calculated intrinsic value which is

TK 14.29 per share.

Square TextilesMarket Value 102.75Intrinsic Value 14.29

102.75

14.29

SQUARE TEXTILES LTD.

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Reasons behind Higher Market Price of Square Textiles:

1. Paid-up Capital:

Usually investors wants to invest in such a company which mostly depends on their

shareholders for any sort of financing rather than debt financing. Square Textiles do depend

largely on equity financing as a large portion of their capital has been invested by their

shareholders.

In this graph we can see that, Square Textiles generated a high amount of capital (1344

Million) from there shareholders in comparison to ASKML (84 Million) and HR Textiles

(253 Million), which attracts the investors towards this share and as a result the share price

is higher in the market.

Paid-up capitalSquare Textile 1,344ASKML 84HR Textile 253

1,344

84253

Mill

ion

PAID-UP CAPITAL

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2. Foreign Investors:

Foreign investors for a particular organization can be crucial as they bring different types

of innovative ideas, technology and management policies from abroad to the local

company. In case of Square Textiles, significant percentage of their shareholders are

foreign investors which is shown in the graph below:

In this graph we can clearly see that Square Textiles has large percentage of investors from

foreign countries which makes them superior from other companies in textile industry. As

a result, it works as a key tool for investors to invest on the shares of Square Textiles which

is gradually increasing the price of the share.

Foreign InvestorsSquare Textile 6.39%ASKML 0.29%HR Textile 0%

6.39%

0.29% 0%

PERCENTAGE OF FOREIGN INVESTORS

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3. Number of Trades:

As Square Textiles is one of the renowned company in Bangladesh, significant number of

investors invests in the shares of this company, which increases the number of trade in the

market and also the price of the share.

The graph clearly shows that the number of trade of Square Textiles is significantly higher

than the rest of the two companies which shows a clear preference of investors to invest in

Square Textiles shares because of the higher liquidity.

4. Public Confidence:

Investors do have confidence on the shares of Square Textiles as it is one of the largest and

renowned textile companies in Bangladesh and the past record is pretty good so far.

Moreover, the Square Group was founded by Samson H Chowdhury who was one of the

most respected persons in Bangladesh which also adds some value to the shares of the

company. So, investors do not hesitate to invest in the shares of Square Textiles, which

overvalues the price of the shares.

Number of TradeSquare Textile 716ASKML 59HR Textile 98

716

59 98

NUMBER OF TRADE

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Apex Spinning & Knitting Mills Ltd.


Growth Rate (g)


FV = PV (1+i)5 TK1.50 TK1.88 1.88 = 1.50(1+i)5 i = 5%



Ke = Rf + (Rm-Rf) * β 5% 15.41% 0.77 Ke = 0.05 + (0.1541 – 0.05) * 0.77 Ke = 13.02%

Intrinsic Value (V)


V = [{D0(1+g)}/(Ke-g)] TK 1.88 5% 13.02% V = [{1.88 (1+0.05)}/(0.1302 – 0.05)]

V = TK 24.61





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the average market price of ASKML. We can see that the market price of the share is TK 82.00

per share which is very much higher than our calculated intrinsic value which is TK 24.61 per

share.

ASKMLMarket Value 82Intrinsic Value 24.61

82

24.61

APEX SPINNING & KNITTING MILLS LTD.

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Reasons behind Higher Market Price of ASKML:

1. High Payout Ratio:

As ASKML is a 100% export oriented organization, they are producing the products at a

lower cost in Bangladesh and selling at a comparatively higher price in the foreign markets,

which generates a large amount revenue. So, they are investing a large amount of capital in

the stock market and also earning in a large portion in comparison to other organizations in

textile sector. As a result, they are giving away a large percentage of their earnings to their

shareholders which influence existing and other investors to invest more in the shares of

ASKML, which raises the price of the shares.

In this graph, we can see that ASKML is giving the highest percentage of earnings to their

shareholders in comparison to the rest of the companies. Many of the investors might not

take this higher payout ratio positively as they are not keeping a large portion of earnings

for their expansion. The reality is, ASKML is one of the largest textile organizations in

Bangladesh and have very few necessity of expanding further. Still for safety reasons, they

are retaining a small portion of earnings and distributing the larger part to the shareholders.

Payout RatioSquare Textile 89.552%ASKML 36.217%HR Textile 65.217%

89.552%

36.217%

65.217%

PAYOUT RATIO

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2. Less Risky:

Even though ASKML’s payout ratio is high, it is also less volatile as the beta (β) is less

than the standard beta of 1, which means, the security is less volatile than the market.

Because of that, conservative investors keep the ASKML shares in their priority list as it is

less risky and also giving them a higher return compared to the rest of the companies of

this industry. As a result, investors are purchasing the shares of ASKML which increases

the price of the shares.

From the graph we can see that in comparison to the rest of the two companies, the ASKML

contains lower beta (β).

BetaSquare Textile 1.09ASKML 0.77HR Textile 1.34

1.090.77

1.34

BETA

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HR Textiles Ltd.


Growth Rate (g)


FV = PV (1+i)5 TK1.00 TK1.66 1.66 = 1.00(1+i)5 i = 11%



Ke = Rf + (Rm-Rf) * β 5% 15.41% 1.34 Ke = 0.05 + (0.1541 – 0.05) * 1.34 Ke = 18.95%

Intrinsic Value (V)


V = [{D0(1+g)}/(Ke-g)] TK 1.66 11% 18.95% V = [{1.66 (1+0.11)}/(0.1895 – 0.11)]

V = TK 23.18





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the average market price of HR Textiles. We can see that the market price of the share is TK

33.45 per share which is a bit higher than our calculated intrinsic value which is TK 23.18 per

share.

HR Textiles Ltd.Market Value 33.45Intrinsic Value 23.18

33.45

23.18

HR TEXTILES LTD.

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Reasons behind Higher Market Price of HR Textiles:

1. Large Percentage of Public Shares:

As HR Textiles is distributing a large percentage of shares as a common stock, the price of

the shares is staying within the range of the investors as the market price of the shares is

pretty close to the intrinsic value. Moreover, as the share price is moderate, investors do

want to invest in the share to have a higher return in the future, which gradually increases

the price of the share.

The graph shows that HR Textiles distributes the largest percentage (36.88%) of shares to

the public in comparison to Square Textiles (19.88%) and ASKML (18.64%).

2. Moderate Retention Ratio:

Maybe not the highest but HR Textiles do have a decent amount of retention ratio

(34.783%). It signifies that company may have further expansion plan in mind. So, it may

attract the investors to invest in the shares of this company as further expansion of the

company will lead to even higher price of shares of the company.

Percentage of Public SharesSquare Textile 18.64%ASKML 19.88%HR Textile 36.88%

18.64% 19.88%

36.88%

PERCENTAGE OF PUBLIC SHARES

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Recommendations

Even though the condition of the shares of Square Textiles, ASKML and HR Textiles is pretty

good, still we have suggested some factors which investors should analyze before investing:

Square Textiles Ltd.:

Higher Pay Out for Shareholders:

Payout ratio is significantly less for Square Textiles Ltd. even though they are not in the

growth phase nor they have any significant expansion plan in the future. So, income

oriented investors should think twice before investing into the shares of Square Textiles as

the dividend is not that much higher and also there is less chance of capital gain.

Apex Spinning & Knitting Mills Ltd (ASKML):

Analyze the P/E Ratio Carefully:

Even though the shares of ASKML is giving a good return to the investors with less risk,

its P/E ratio is too high (50.56) in comparison to normal standard (10-17). At the first look,

investors might think that it is good as it has high expected future growth in earnings but it

might also be the case that the earnings is exceptionally low or the stock may be subject to

speculative bubble. So, investors should not only look at the value of the P/E ratio but also

the factors through which it is calculated.

HR Textiles Ltd.:

Involvement of Foreign Investors:

Even though HR Textiles Ltd. has a goal to export their products in foreign countries, all

of their investors are local people and do not have any foreign investors. As a result, they

might lack innovation as they have less variation of ideas. So, the shares of HR Textiles

Ltd. is not appropriate for investors who wants to invest in the share of an innovative

company.

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Conclusion

Square Textiles, ASKML and HR Textiles Ltd. are three of the leading textile companies

in Bangladesh and has a significant influence in the stock market. We have calculated the

intrinsic value of the shares of these companies and compared with their average market

price. We came up with a solution that the market price of these stocks are overvalued in

comparison to their intrinsic value because of some specific legal reasons. Though the

market condition of the stocks of these companies are pretty good, still it can be improved

if the management of the companies takes some significant measures.

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References

(2009). Annual Report. Dhaka: Sqaure Textiles Ltd.

(2009). Annual Report. Dhaka: Apex Spinning & Knitting Mills Ltd.

(2009). Annual Report. Dhaka: HR Textiles Ltd.

(2012). Annual Report. Dhaka: Square Textiles Ltd.


(2012). Annual Report. Dhaka: HR Textiles Ltd.


Apex Group. (2014). Retrieved from Apex Spinning and Knitting Mills Ltd.:

http://www.apexknitting.com/

Dhaka Stock Exchange. (2014, February 17). Retrieved from http://www.dsebd.org/

Square Group. (2014). Retrieved from Square Textiles Ltd.:

http://textile.squaregroup.com/sqtextile.html

Stock Bangladesh. (2014, March 30). Retrieved from

http://www.stockbangladesh.com/resources/coefficient

Stock Bangladesh. (2014, April 4). Retrieved from

http://www.stockbangladesh.com/symbols/details2/17421/0

Stock Bangladesh. (2014, April 4). Retrieved from

http://www.stockbangladesh.com/symbols/details2/17446

Stock Bangladesh. (2014, March 4). Retrieved from

http://www.stockbangladesh.com/symbols/details2/17442/0

Nahian. (2012, August 15). Educarnival Pedia. Retrieved from

http://edupedia.educarnival.com/human-resource-management-practices-in-h-r-

textile-of-bangladesh/

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Stock Valuation & Analysis