Comprehensive

Investment Analysis
on Summit Power
Limited

Course Instruction

Analysis of Financial Investment

F-307

Submitted to
Hussain Ahmed Enamul Huda
Lecturer
Department of Finance
University of Dhaka

Submitted by
Ummul Wara
17-090
Saida Homaira
17-166
Md. Rezwan Islam
17-172
Md. Maksud Hassan
17-174
Zonayed Mahid
17-182

Members of
Section: B
17th BATCH
Department of Finance
University of Dhaka

Submission Date: 25-February-2014

1

Letter of Transmittal
25 February, 2014
Hussain Ahmed Enamul Huda
Lecturer
Department of Finance
University of Dhaka
Subject: Submission of the report Comprehensive Investment Analysis on Summit
Power Limited
Dear Sir,
As per the requirements of the course Analysis of Financial Investment (F-307) offered
at Department of Finance, University of Dhaka under your supervision, we submit here
our report on Comprehensive Investment Analysis on Summit Power Limited that you
assigned us to prepare.
Our final report is based on data from various sources and basis on our findings. I
believe that the knowledge and experience that I gained will be of great importance both
for future courses and work lives.
I would also like to state that the sole purpose of creating the report is for the completion
of the course work. No part of this report will be reproduced for use in any other form of
publication in the future without your written permission.
We shall be available for any clarification, if required.
Sincerely,
Ummul Wara
17-090

Table of content
Executive Summary.....4
Company Overview of Summit Power Limited.6
Free Cash Flow Model.7
Industry Analysis...9
Company Analysis..17
Dividend Discount Model..31
Relative Valuation..32
Technical Analysis..34
Appendix..54

Executive summary
This report is prepared to give all the analysis sought to be done for investment
assessment of the Summit power Ltd, a market leader in the fuel and power industry in
Bangladesh. The topic covered here will be a guiding, if not dictate, to the stock investor
in aspect knowledge regarding the financing discipline.
First, we calculated the intrinsic value of the share based on free-cash model. This
procedures is conducted by the aid of empirical data and assumption as per relevant.
The WACC is calculated to incorporate the value.
Then, we moved towards conducting Top- Down approach starting with the global
economy and the macroeconomic analysis of the fuel and power industry on a very
short and precise manner. Industry analysis shown next involves Porters 5 forces
model of competitive edge, Herfindhal index, S-C-P analysis, Industry life cycle,
government influences and future plan, VRIN model and Ansoff matrix. In the company
analysis we included product and services, current position, research and development
activities, management and corporate culture, analysis of demand, expected
opportunities, analysis of supply, financial overview, margin & growth analysis,
operational performance metrics etc.
After that, we conducted the dividend discount model method to calculate the value of
the share of Summit power with two procedures of changing and constant growth
model. All the key assumptions were given as per requirement.
The relative valuation model is performed right then with the 4 categories: earning
multiplier, price to sales, price to cash flow and price to book value. It helped to
calculate the value of the share of Summit power in comparison of the company in the
fuel and power industry. The economic value added (EVA) is displayed for the Summit
power after the valuation.
Right next, the technical analysis was conducted for the studies of companys share
price pattern to be considered. It includes Dow Theory, head and shoulder pattern,
inverse head and shoulder pattern, double top, double bottom, triple top, triple bottom,
triangle based continuation pattern and rectangle based continuation pattern etc.
incorporating analysis in the required periods delegated. Alongside, support and
resistance level of the stock chart were assessed.
The report also address the price pattern of Summit power based on the success rate
of different technical indicators like MA, RSI, MACD, Stochastic oscillator, Bollinger
band, MFI. The analysis divulges any necessary interpretation required for the assigned
period to be considered.

Finally, the report includes analysis which was possible through various calculation. For
the clear understanding of the work to the interpretation and assessment of the Summit
power, all the calculation conducted in the excel worksheet is provided at the end as
Appendix. Other than that, any useful information necessary or any graphical pattern
used for work was given in the main body part of the report.

Company Overview of Summit Power Limited

Summit Power Limited (SPL), sponsored by Summit Group, is the first Bangladeshi
Independent Power Producer (IPP) in Bangladesh in private sector providing power to
national grid. SPL was incorporated in Bangladesh on March 30, 1997 as a Private
Limited Company. On June 7, 2004 the Company was converted to Public Limited
Company under the Companies Act 1994.
Summit Power Limited in 2001, has successfully established three power plants of 11
MW capacity each, for sale of electricity to Rural Electrification Board (REB) on Build,
Own and Operate basis at Savar, Narsingdi and Comilla.
During 2006 and 2007 in each of the above three places, 2nd unit was commissioned
enhancing the capacity of SPL to 105 MW. In 2009 SPL with its 99% owned two
subsidiaries has established 4 new power plants raising its capacity to 215 MW. In 2011
SPL has commissioned another power plant of 102 MW capacity at Narayanganj under
Summit Narayanganj Power Limited, where SPL has 55% ownership.
In the year 2011 Summit Power Limited has consolidated its position further by
acquiring 53,955,326 numbers of ordinary shares of Khulna Power Company Limited
(KPCL). It gives SPL the status of 18.7% of the ownership of KPCL and with that status
an additional capacity of 50 MW (approximately) has been added with that of SPL being
the total capacity of 367 MW.
Considering the immense opportunities, the company is striving to establish more power
plants around the country. The fast-growing company has set a mission to expand the
company with a power generation capacity to the tune of a modest 20% of the electricity
requirement in Bangladesh.

Free Cash Flow Model

Performance Forecast
Net Income
Total Assets
Total Liabilities
Shareholders
Equity

2013
3,542,007,021
26,891,028,235
9,423,478,154
17,467,550,081

2014
4,960,652,169
33,371,161,071
12,133,515,342
21,237,645,729

2015
6,845,821,962
42,275,388,607
15,834,918,187
26,440,470,420

Beta for free cash flow valuation: 0.991988151

WACC: 0.137149945
Value per Share using free cash flow valuation: Tk. 66
Assumptions:
1.
2.
3.
4.
5.

No income tax was paid by SPL

No loan repayment was made as PPE increased.
Last 5 years month end value was taken for share price and index value.
Perpetual growth rate is considered 2.5%
Risk Free Rate is 7.25%

Details are shown in the appendix

Top down approach

Global economy
For many in todays world, the end of energy poverty is the beginning of economic
liberty. In the emerging countries, hundreds of millions are benefiting from energy in
multiple ways irrigation of fields, lighting for schools, transport to work and new job
opportunities. According to research demand for energy is likely to increase by around
1.5% on average each year and almost all of this will come from emerging economies.
While some raise legitimate concerns over development, the global community as a
whole continues to demand more energy and the continuation of progress in this sector.
Macro Economy
Considering Bangladesh and its readily falling stock market, fuel and power sector is
managing to make decent profit. The reason behind this is so as to the companies in
the fuel and power sector are doing much better after the government passed on new
regulations. The prime reason that investors should consider this sector is for the fact
that it generates more profit than other sectors at least for the time being. The energy
sector of Bangladesh has got a high priority in some previous budgets. The government
plans to increase the electricity generation in the coming years due to this reason the
energy sector has the most potential right now. Foreigners and local investors are
investing their money in this sector and helping it grow.

Industry Analysis
Porters five forces model of Summit Power Limited:
1) Rivalry among the existing competitor: The rivalry among firms in fuel and power
industry is not too intense. Industrys profitability depends on the level of competition
among the firms within an industry. Public sectors contribution in fuel and power
industry is 57% and in private 43%. Different firms in public and private sectors dont
have equal contribution in national power grid.
Summit Group is the first Bangladeshi Independent Power Producer (IPP) in
Bangladesh in private sector providing power to national grid. This has given Summit
Power Limited an edge over others in becoming the leading Bangladeshi company with
eleven operating plants of its own and two operating plants with co-ownership. As all
these power plants were made available to the extent required according to the Power
Purchase Agreement (PPA), it indicates excellent operational performance of Summit
Power Ltd. SPL is the fast-growing company in fuel and power industry and less likely to
compete on price. Summit power ltd.s mission is to expand the company with a power
generation capacity to meet the electricity requirement in Bangladesh.

2) Threat of New Entrants: Industry is more attractive when threat of new entry is low.
In private sector power generation, summit power ltd is the pioneering Bangladeshi
company. Present power generation of SPL is 317 MW. Again SPL has acquired 18.7%
of Khulna Power Company limited which is the only private firm that has been importing
fuel to generate electricity from international market. In 2012, total installed capacity
under summit power limited is 366.5 MW. SPL can impose some entry barriers like

First mover advantage

Maintaining internationally standard engines
Economies of scale: Being a market leader in private sector and efficient
utilization of capital, machines, material and human resources, SPL are
Generating electricity with a lower cost.
Highly capital intensive and has cost advantages.

3) Threat of Substitute: Threat of substitute of SPL is low in fuel and power industry.
Unique services provided by SPL cant be easily copied.
Summit power ltd is the only co. to construct in world standard, a medium size
power plant.
It has always used brand new highly efficient engines/turbines and other
auxiliaries of best international standard to generate electricity. It attempts to
9

spend bare minimum fuel for generation of electricity and save costly fuel of the
country.
The new and quality machine allows for Summit Power Limited to maintain its
guaranteed contractual availability and Heat Rate ensuring efficient use of fuel
and gas. It imports furnace oil to ensure quality of the fuel oil and to get better
output from the power plants.
Again, Summit Power Limited is the only company that has completed the
construction of HFO fired rental power plants within the scheduled 270 days
time.
Again, it has achieved outstanding business achievement for perseverance and
leadership in excellence and quality in accordance with the QC 100 Criteria from
Business Initiative Directions (BID).

4) Bargaining Power of Buyer:Though the BPDB is the only buyer of electricity in

Bangladesh, bargaining power of buyer is low. Government is bound to purchase
electricity according to Power purchase agreement.Summit tries to Generate and
provide uninterrupted reasonably priced electricity to the customers. Continuous
improvement of customer satisfaction and resource management is the objective of
summit.

5) Bargaining Power of supplier: The oil and natural gas market is primarily operated
by the Bangladesh Oil, Gas and Mineral corporation Which holds the shares of all stateowned companies involved in oil and gas production and exploration, and the
Bangladesh Petroleum Corporation (BPC) is responsible for the refining ,distribution
and import of crude oil and petroleum products. The natural gas sector consists of
Petrobangla and its 11 operating gas sector entities which are responsible for Gas
production, distribution, transmission in fuel and power industry. The Government is
trying to increase the electricity generation in improving the power and Gas supplies.
Here, also bargaining power of suppliers is limited.

10

Herfindhal Index:

Entities

Summit power
limited

Capacity MW
% of Market
share

316
48%

Khulna power
company
limited
265
40%

GBB power
limited
22.8
3.5%

Barakatullah
Electro Dynamics
Ltd.(BEDL)
51
7.8%

We know that The Herfindahl Index for these market shares is:
HHI= .48^2+.40^2+.035^2+.078^2
=.398; it indicates that market is highly concentrated fuel and power industry.
Summit Power limited has mainly four competitors. They are Khulna power company ltd
with 40% market share, GBB power ltd with 3.5% market share, BEDL with7.8% share.
Of them SPL is the market leader holding 48% market share in the private sector of
Independent Power Producers.

S-C-P
1. Structure: The actual performance of firms in the market affects market structure
e.g. rising dominance of best performing businesses .Summit Power is the Market
leader of Independent power producer in Private sector of fuel and power industry.
Being within less competitive industry, Summit power limited faces fewer constraints
and greater ranges of conduct option. SPL finds ways to obtain competitive advantage.
This fuel and power industry is highly capital intensive and summit company can impose
many entry barriers to other firms that ensure its sustainable competitive advantage.
2. Conduct: Summit power limited has some market conducts within this industry.
According to recent years information summits conducts are

Recent expansion and capital expenditure plan (graphical chart as reference)

Strong market to supply ensuring future certainty

Pretty good trade conducted with the company delivering inputs with medium
bargain power deriving hefty supplies accommodated.

11

3. Performance: The performance of Summit Power Limited under this fuel and power
industry:

High turnover and formidable net profit generated (Increase in the units of
electricity generated, increase in per unit sale rate and achievement of greater
operational efficiency causes rise in revenue)

Total asset of the company increased by 6% (Significant increase in Cash

balance, for IPO subscription of and Summit Purbanchol and better operating
cash flow of summit Narayanganj.)

Total equity increased by 11.29% through bonus share demonstrating retained

income is invested further consistently.

Best fast track project in Asia.( SPL has completed the construction of HFO fired
rental power plants within the scheduled 270 days time)

Life cycle:

Energy sector of Bangladesh is on top of all economic issues as demand for power has
been increasing at a high pace and is imperative for economic growth. Though
production and supply side of electricity is in question due to scarcity of resources,
financial performance of power generating companies are showing healthy trend in
profitability. According to BPDB, electricity demand in Bangladesh has been increasing
by 200 MW per year since 1996 and the total demand is projected to be more than
11,405 MW by 2016.As demand for electricity is forecasted to grow in next upcoming
years, it is expected that power generation companys future in fuel and power industry
is very opportunistic in accordance with future market demand and economic growth of
the country. Summit power limited is in the rapid acceleration growth stage of industry
life cycle. Its growing fast facing little competition and has a potential future growth
opportunity. SPL has set a mission to expand the company with a power generation
capacity to the tune of 1000MW which is 20% of the electricity requirement in
Bangladesh.

Government influences:

12

Exemption from corporate income tax for a period of 15 years.

Allowed to import plant and equipment and spare parts up to a maximum of ten
percent (10%) of the original value of total plant and equipment within a period of
twelve (12) years of commercial operation without payment of customs duties,
VAT and any other surcharges as well as import permit fee except for
indigenously produced equipment manufactured according to international
standards.

Repatriation of equity along with dividends allowed freely.

Exemption from income tax for foreign lenders to such companies.

The foreign investors will be free to enter into joint ventures but this is optional
and not mandatory.

Government future planning:

According to Bangladesh Power development Board, by 2021, demand for electricity is
projected to increase to 20,000 megawatt. The Governmentwill take all possible actions
aiming at enhancing our generation capacity.
At present the maximum generation capacity is 8,525 MW. According to Bangladesh
Power Sector Master Plan, the electricity demand would be 34,000 MW by the year
2030 to attain 8% GDP. Bangladesh needs total US$17 billion investments in power
sector to minimize this demand-supply gap. Various measures taken by the
Government to bring improvement to the power sector include:

Setting up 54 new power plants that generated 3,845 MW ofelectricity in total.

Signing 59 agreements to put into operation 61 power plants withgeneration

capacity of 8,288 MW.

27 new power plants with generation capacity of 5,437

underconstruction currently and would start operating in 2016

Ensuring that 60% of Bangladeshs population has access toelectricity and

increasing energy production per head from 183 KWhto 292 KWh

Reduced system loss in electricity distribution from 15.67% to12.26%.

MW

are

13

19 new power grids of 2,743 MVA capacitieswere set up and 644kilometers of

powergrid was installed.

To minimize thedemand- supply gap,the Government hasallocated Tk

78,960million for the powerdivision this year,which is Tk 7,040million higher than
the revised allocationof last year.

Generation Planning is one of the most important parts of the power management
system and the reliability of the whole power management system depends largely on
the reliability of power generating system. There are five types of plants to generate
electricity like Reciprocating Engines, steam turbine, Gas turbine, combined cycle,
hydro type plants. The Generation Capacity by Fuel Type, it is found that the Natural
Gas consumed engines had the lead in 2012. These engines generated 67.21% of
electricity in 2012.

VRIN Model:

Summit Company limited has some resources which have sustainable competitive advantage
over other competitors. Companys borrowing capacity and internal fund are the sources of
financial resources where it has sustainable and temporary competitive advantage respectively.
SPL maintained international standard quality plant and equipment under physical resources to
generate electricity by using minimum fuel and saves cost of the fuel and power industry.

VRIN
Model
template:
RESOURCE
S
Financial
Companys
borrowing
capacity
Internal funds
Physical
Plant
Equipment
Technology
Technological

VALUABL
E?

RAR
E?

COSTLY
DIFFICULT
IMITATE?

& NONTO SUBSITUTAB

LE?

yes
yes

yes
yes

yes
yes

yes
no

Sustainable competitive advantag

Temporary competitive Advantage

yes
yes
yes

yes
yes
no

yes
yes
yes

yes
yes
no

sustainable competitive advantag

sustainable competitive advantag
temporary competitive advantage

CORE COMPETENCY

14

Proprietary
technology
(patents,
copyrights etc.)
Human
Skills, expertise
Commitment
and loyalty of
employees
Reputation
Relationship
with customers
With suppliers
Management
capabilities
Strategic
control
Coordination of
business units
Resource
management
Sales
Quality
of
customer
service
Effectiveness in
executing sales
Information
management
Information
system which
is
comprehensive
and effective

yes

yes

yes

yes

sustainable competitive advantag

yes

no

yes

no

Temporary competitive advantag

yes

yes

yes

yes

sustainable competitive advantag

yes
yes

yes
yes

yes
yes

yes
yes

sustainable competitive disadvan

sustainable competitive advantag

yes

yes

yes

yes

sustainable competitive advantag

yes

yes

yes

yes

sustainable competitive advantag

yes

yes

yes

yes

sustainable competitive advantag

yes

yes

yes

yes

Sustainable competitive advanta

yes

yes

yes

no

Temporary Competitive advantag

yes

no

yes

no

Temporary Competitive advantag

Ansoff Matrix:
SPL tends to grow their business through the following strategy under this Ansoff matrix
1) Market Development: The SPL follows this strategy which entails finding new
markets for existing products. Market research and further segmentation of
markets helps to identify new groups of customers. In February 2012, GE had
signed an agreement to become an equity partner with Summit Group in the
Bibiyana II project with purpose of adding together more than 1,000 MW to feed
into the national grid. With this expansion, The Government plans to increase the
country's electricity from 8 to 20 GW by the next 6 to 8 years.
15

2) Diversification: This strategy is not appropriate for this Company. Because SPl
doesnt move away what it is currently doing.

3) Market Penetration: This involves increasing market share within existing

market segments. SPL increase its market share positively with increasing
demand of electricity to serve existing customers or by finding new customers
within existing markets. SPL has a target to expand the company with a power
generation capacity to the tune of 1000MW which is 20% of the electricity
requirement in Bangladesh.

4) Product Development: SPL doesnt follow this strategy. SPL is pioneered

independent power producer. It has brought about the new market for existing
market.

16

Company Analysis
History
Summit Power Limited (SPL), Sponsored by Summit Group, is the first Bangladeshi
Independent Power Producer (IPP) in Bangladesh in private sector providing power to
national grid. SPL was incorporated in Bangladesh on March 30, 1997 as a Private
Limited Company. On June 7, 2004 the Company was converted to Public Limited
Company under the Companies Act 1994. In 2001, SPL has successfully established
three power plants of 11 MW capacity each, for sale of electricity to Rural Electrification
Board (REB) on Build, Own and Operate basis at Savar, Narsingdi and Comilla. During
2006 and 2007 in each of the above three places, 2nd unit was commissioned
enhancing the capacity of SPL to 105 MW. In 2009 SPL with its 99% owned two
subsidiaries has established 4 new power plants raising its capacity to 215 MW. In 2011
SPL has commissioned another power plant of 102 MW capacity at Narayanganj under
Summit Narayanganj Power Limited, where SPL has 55% ownership.

Product and services

The principal activity of this company is to generate electricity and to deliver the output
to the national grid. The only customer of the company is the Bangladesh Power
Development Board (BPDB).

Current position:
SPL is the leading company in the private energy sector of Bangladesh. Among all the
competing companies, SPL has the largest capacity of 316.25 MWh which is almost
93% of total capacity licensed to its peer group. As this company possesses the biggest
pie of market share of 48% among IPPs( independent power producer) and produce
electricity by means of the cheapest source of fuel, natural gas, it has competitive
advantage over other companies to uphold steady growth in turnover. In 2012 at the
end of full accounting period, net profit margin was 42.20% and profit before interest
payment was 4.87 times higher than its financial expenses. Contributing to the national
grid of electricity from operating 11 plants, it has been achieving the highest profitability
margin in the industry over last two years while net profit margin of the industry was
29.16%. Summit Power Limited is the only company for construction of HFO fired quick
rental power plants within 270 days time, the company had received international gold
award on September 28, 2011 as The Best Fast Track project in Asia. This is indeed a
great recognition of the ability of the country in general and Summit in particular, to
17

construct inworld standard, a medium size power plant. Summit Narayanganj Power
Limited had achieved financial close by receiving a foreign currency term loan of USD
45 million from DEG.

Research and development activities:

Summit Power Limited has always focused on using brand new highly efficient engines
and other auxiliaries of best international standard. The R&D departments aim isto
spend bare minimum fuel for generation of electricity and save costly fuel of the country.
The new and quality machine allows for Summit Power Limited to maintain its
guaranteed contractual availability and Heat Rate (fuel consumption for generation of
one unit of electricity) ensuring efficient use of fuel and gas.

Corporate Governance:
The philosophy of corporate governance of the Company is aimed at assisting the top
management in efficient conduct of its affairs as well as in meeting obligations to all the
stakeholders and is guided by strong emphasis on transparency, accountability and
integrity. It provides the Company with strategic guidance as to how the objectives are
set and achieved, how risk is monitored and assessed and how the performance is
maximized. In discharging its responsibilities, the Board fulfills certain key functions,
including:

Reviewing and guiding corporate strategy, major plans of action, risk policy,
annual budgets and business plans; setting performance objectives; monitoring
implementation and corporate performance.

Ensuring the integrity of the Companys accounting & financial reporting

systems, in particular, systems for risk management, financial and operational
control and compliance with the law and relevant standards.

Reviewing Companys financial statements and oversee its compliance with

applicable audit, accounting and reporting requirement.

Monitoring implementation and effectiveness of the approved strategic and

operating plans.

Establish companys value.

Oversee the corporate governance of the Company

18

The Companys policy is to maintain optimum combination of Directors. The Managing

Director of the company is a non-shareholder ex-office director and the board has
appointed two independent directors as per the Security and Exchange Commissions
requirement. The Board ensures that the activities of the Company are always
conducted with adherence to high ethical standard and in the best interest of the
shareholders.
Management and corporate culture
The Management of Summit Power Limited (Summit) formulates and implements
tactical plan and assists for operational Plant to align the organization as per strategic
objectives and policies provided by the Board. In Summit, the Management is in full
control of the Companys affairs and is also accountable to the Board. The Management
firmly believes that the success of the company is on the fair practice of the corporate
governance. In discharging its responsibilities, the Management fulfills certain key
functions, including:

Implementing and providing feedback about the corporate strategy, major plans
of action, risk policy, annual budgets and business plans; performance
objectives.

Assisting the Board to ensure the integrity of the Companys accounting &
financial reporting systems, in particular, systems for risk management, financial
and operational control and compliance with the law and relevant standards.

Assisting the Board to review the Companys financial statements and oversee
its compliance with applicable audit, accounting and reporting requirement.

Assisting the Board to monitor and implement the effectiveness of the approved
strategic plant by adopting relevant tactical and operating plans.

Establish Companys value as defined by the Board monitor and feedback about
the corporate governance of the Company to the Board.

19

Analysis of demand
Sources of demand
Of the 1.4 billion people of the world who have no access to electricity in the world,
Bangladesh accounts for over 152 million. A booming economic growth, rapid
urbanization and increased industrialization and development has increased the
country's demand for electricity. Presently, 62% of the total population (including
renewable energy) has access to electricity and per capita generation is 321 kWH,
which is very low compared to other developing countries.
Table: Sector wise consumption of Electricity In Million Kilowatt Hour

Year

Domestic

2006
2007
2008
2009
2010

6946
8910
9006
9619
10020

Industrial
7153
9175
9275
9906
3734

Commercia
l
1243
1595
1612
1722
2049

Other

Total

994
1274
1288
1375
6098

16336
20954
21181
22622
21901

Expected demand and opportunities

Power demand in Bangladesh is increasing at a very high rate and sufficient power
plants were not setup during the last couple of years to coupe up with the demand. As a
result the country is now facing severe power shortage. The present generation
capacity of the country is 6,065 MW against maximum peak demand of approximately
7,500 MW.

A forecast of Peak Demand for the next nine years is as follows as per Bangladesh
Power Development Board (BPDB):

20

According to Bangladesh Power Development Board electricity demand in Bangladesh

has been increasing by 200 MW per year since 1996. The total demand is projected to
be more than 11,405 MW by 2016.. According to
Bangladesh Power Sector Master Plan, in order to attain 8% GDP, the electricity
demand would be 34,000 MW by the year 2030.As demand for electricity is forecasted
to grow on an average rate of 11% for next eight years, we can expect that as a power
generation company future outlook for SPL is very opportunistic in view of market
demand, economic growth of the country and increasing electricity consumption per
capita.

Analysis of supply
Sources of supply:
The present generation capacity (In MW) Table as on December, 2012 of electricity
indicates that the public sector only produced 58% (5,004 MW) and private sector
produced 42%(3,731 MW) of total electricity produced in the country.

21

Financial Overview
Ratio Analysis of past five year

22

70
60
50
40
30
20
10
0

2012

2011

2010

2009

2008

net profit ratio (%)

52.79
42.2

30.19
24.59

2012

2011

2010

2009

26.48

2008

23

gross profit ratio (%)

61.5
59.44

53.39

2012

2011

2010

54.43

52.98

2009

2008

Current ratio
2.17
1.32
0.6

2012

2011

2010

0.89

2009

0.7

2008

return on total assets (%)

12.05

12.54

7.47

2012

2011

2010

6.9

2009

6.86

2008

24

debt equity ratio

56:44:00
41:59:00

2012

45:55:00

42:58:00

2011

2010

2009

2008

price earnings ratio (Times)

35.38

14.03

2012

38.57

37.58

14.62

2011

2010

2009

2008

25

return on equity (%)

27.28
23.2
17.78
12.67

2012

2011

2010

2009

13.95

2008

Compared Financial performance

Though electricity produced and sold by four companies other than KPCL could not
increase in 2012, current turnover growth and liquidity position of the industry is
pleasing due to increase in tariff on electricity. In 2012, the largest private power
26

generating company, SPL sold 1805636MWH electricity which is slightly less than what
it sold in 2011. A 19.05% fall in profit of SPL in 2012 is attributed to significant increase
in general expenses and financial expense. The plunged net profit margin of 42.20% is
still showing SPL as the highest profit earning company. On the contrary, KPCLs profit
of Q3 2012 registered 81.38% growth in profit over previous year. KPCLs forward EPS
of 5.11 also suggest that investor of this company would get higher return on investment
compared to its peers. SPPCL, the subsidiary of SUMITPOWER, and SUMITPOWER
did not behave alike in 2012. While most of the plants of SUMITPOWER produced less
power compared to previous year, SPPCLs energy sold increased by around 7.6% in
2012. Net profit margin rose up from 7.40% to 13.96%.

Comparable Company Ratio Analysis

KPCL

Summit
Power

GBB Power

BEDL

Industry
Average

SPPCL

Profitability
Earning Per Share
Price/Earning Ratio

Return on Asset%
Return on Equity %

3.83%

3.80%

1.04%

9.63%
8.53%
23.87%

12.29%
11.71%
16.83%

17.86%
4.01%
4.13%

81.00
%
17.47
%
2.92%
3.42%

6.17

3.13%

9.38%
10.42%
14.58%

13.33%
7.52%
12.57%

Margin
Analysis
Gross Margin%
Operating Profit
Margin

21.3

61.5

49.11

20.05%

53.10%

48.58%

Net Income Margin%

13.96%

42.20%

2130
0.61
0.94
8.3

Asset
Turnover
Total Asset Turnover
Fixed Asset Turnover
Inventory Turnover

54

48.97

48.64%

43.60%

20.41%

58.92
47.63
%
31.05
%

38.16%

29.16%

6150

4911

5892

5400

4897

0.28
0.36
2.51

0.2
0.25
5.22

0.09
0.13
0.93

0.27
0.43
5.6

0.29
0.42
4.51

Short Term
Liquidity
27

Current Ratio
Quick Ration
Avg. Days Payable
Out.

0.95
0.79

2.17
1.78

7.73
7.08

4.85
4.15

3.04
2.85

3.75
3.33

134.35

64.73

192.65

148.01

63.24

120.6

Total Debt/Equity

0.77

0.28

0.1

0.23

0.28

Total Debt/Capital

0.64

0.3

0.03

0.15

0.29

0.28

3.24

4.87

1.89

4.19

4.12

3.66

2.80%

1.44%

1.03%

1.17%

1.40%

1.57%

Long Term
Solvency

Others
Times Interest
Earned
Equity Multiplier

Margin and Growth Analysis

In the last twelve months (LTM), SPL is the only one of its competitive group to
experience positive revenue growth (at a rate of 24%). SPLs revenue growth over the
last three years has been a staggering 37% per year which is more than its competitors.
This is evidence that the market places a high value on SPLs future growth
opportunities. From a profitability standpoint, SPLs ROA last period was 8.53%, while
the industry average was 7.52%. From a margin perspective, SPLs gross margin is
lower and net income margin was higher than competitors in 2012 because the
company has been making some large capital investments and growing quickly which
all contribute to lower FCF.

Operational Performance Metrics

Fixed Asset Turnover: SPLs rate is a staggering 9.4x, while the industry
average is at 4.2x. This is evidence that the company has very little capital
tied up in fixed assets.

Liquidity: SPLs current and quick ratios are far below industry average
(3.3x and 3.75x). This is a testament to the companys low levels of cash,
high levels of fixed assets and liabilities, and high debt.
28

Average Days Sales Outstanding: SPL ratio is currently at 143x

compared to industry average of 120x. Thus, SPLs is poor at collecting
cash on its revenues and slower than the competition.

Cost of Capital
We used the CAPM formula to calculate the companys cost of capital. We ran a
regression of daily stock returns against the DSE (given SPLs risk profile, age, and
size) over the last five years and arrived at a Beta of .99. For the Risk Free Rate (Rf),
we calculated the average 91 days treasury yield, which is approximately 7.25%. For
the Return on the Market (Rm), we calculated the compounded annual return of the
DSE over the last 5 years and arrived at 13.12%. Running the CAPM formula of Rf +
(Rm-Rf)B, we arrived at 13.07% for our cost of capital.

Free Cash Flow Analysis

To build our pro forma financial model we applied 3% perpetual revenue growth for
2013-15. We based this on our recommendation to make aggressive moves nationally
and market opportunities. We also assumed that the company would need to make
some capital investments and investments in working capital. To calculate the terminal
value we discounted the free cash flow taking WACC as discount factor. Then equity
value was calculated by taking all the discounted cash flow plus cash balance of 2012
minus interest bearing debt. Then equity value was divided by number of outstanding
share which is 591540246 to get value per share which is Tk.66.

29

Dividend Discount Model

a. Changing growth model:
1-3
10%
K
Dividend per share
Value

4-6
07%
13.1%
Tk. 2.3
Tk. 59.3

7-9
04%

10 onwards
02%

Assumptions:
1. Growth will decrease in a chronological basis
2. 10 years onward perpetual
b. Constant growth model:
G
K
Dividend per share
Value

2.5%
7.5%
Tk. 2.3
Tk. 47.15

Assumptions:

30

1. Growth is considered relevant to magnitude of Summit Powers operation

Relative Valuation
a. PE ratio:
PE ratio
Price

KPCL
17.73
48.4

Summit power
20.2
55.1

b. Price to cash flow:

Cash flow
Price

KPCL
7.45
48.4

Summit power
8.48
55.0

KPCL
1.3
48.4

Summit power
3.45
128.5

KPCL
1.15
48.4

Summit power
1.39
58.8

c. Price to sales:
Sales
Price
d. Price to book value:
Book value
Price

31

Assumptions:
1. KPCL chosen for relative valuation analysis as being the closest competitor.
2. KPCL data price taken, otherwise other data are calculated.
3. Industry long term growth is set at 10%, that rate is used for the growth rate of
cash flow, sales and book value for both the companies.

Economic Value Added

Economic Value Added (EVA) is a measure of a companys financial performance based
on the residual wealth calculated by deducting cost of capital. From its operating profit
(adjusted for taxes on a cash basis). The formula for calculating EVA is as follows:
EVA = Net Operating Profit after Taxes (NOPAT) - (Capital X Cost of Capital)
2012 2011
Ta
2012 (tk)
2011 (tk)
Net operating profit 1,873,474,068
2,511,150,489
after tax
Average shareholders 10,611,046,069
8,578,678,954
equity
Cost of capital
13.50%
10.50%
Cost
of
average 1,432,491,219
900,761,290
shareholders equity
Economic Value Added 440,982,849
1,610,389,199
(EVA)
Cost of capital is based on interest of 5 years Government Treasure Bond plus a
standard risk premium.

32

Technical Analysis

Dow Theory:

According to Dow Theory, there are three types of pattern. They are a) Major b)
intermediate c) Minor. Major trends last for longer time period which can be bullish or
bearish major trend. Intermediate trends are the trends that occur within the major
trends. These trends last shorter than major trends. Lastly minor trends occur in daily
intervals.
In our price comparison chart, there are several trends that conform the Dow Theory.
The first one is shown in the next picture:

33

This graph shows the bullish major trend. This trend started at October 2013 and still
continues its bullish pattern. The red line shows the major trend. The blue line shows
the intermediate trends. This intermediate trends show several price corrections. In
these trends, the support level and the resistant level changes accordingly. Circles in
the graph shows various minor patterns. These minor trends are daily based.

34

This second chart also conforms to the Dow Theory. The major trend shows bearish
pattern along with several intermediate trends and minor trends. The major trend
existed for almost four months. The chart is the opposite of the previous chart. Another
example of application of Dow theory is shown below:

Head & Shoulder Pattern:

35

The first head & Shoulder pattern is identified in the 1 st half of 2013.

The second head & Shoulder pattern is identified in the middle half of 2011. In both of
the cases, the price had reversed from their previous trend. Both of the graphs show the
bearish pattern. So, in both cases we get the sell signal.

Inverse Head & Shoulder Pattern:

36

The lone inverse head & shoulder pattern is observed in the august of 2013.After these
pattern had arrived, the price started to decline. This is the bearish signal for the
investor.

Double Top:

There are four occasions when double top pattern is identified. The trend had reversed
after this double top pattern in all these four cases. The first one is shown in the above
picture and the rest of the patterns are shown in the next picture.
37

This is the second example of double top trend.

Double Bottom:

The first double bottom pattern. From this time the trend had changed for a while.

38

The second double bottom pattern. The trend had reversed from this point also. This is
buy signal also.

Triple top:

There is no triple top pattern in the 3 year price of summit power.

Triple Bottom:

Just one triple bottom pattern is identified in the whole price range. After this pattern
price started to climb- a buy signal.

39

Triangle Pattern:

Two triangle pattern is identified in the price. The first one is descending triangle.

40

The second triangle pattern is ascending one. This one is identified in last part of 2013.

Rectangular Pattern:

There are four rectangular patterns identified in the whole price range. The first one is
below one:

41

The second and third one isin the below picture

The last rectangular pattern is in the last half of 2013.

42

Price had reversed its previous position in all three circumstances.

Bollinger Band:
43

The first indicator is Bollinger band. The red circles are the points where price crossed
the upper Bollinger band. This points indicates that price will reverse and fall down.
Exactly the same thing happened in these two red-circled point. This is the sell signal.
On the other hand. The green circle indicates the points where the price crossed the
lower band and the price started to climb. This is the buy signal for the investor.

RSI:
44

RSI indicator works well for this stock. If RSI crosses 70 point then it is sell signal and if
RSI crosses 30 point then it is buy signal. In the above graph, the red circles are the
points where RSI> 70, so the trend reversed and as a result the price moved
downwards. On the other hand, the green circled points are those points where RSI<30.
Here, price had started to increase. So the red circle gives sell signal and green circle
gives buy signal. The first sell signal is at 18/2/2013, the second sell signal is at the end
of November 2013. The first buy signal occurs at the start of May and the second one
occurs at mid-October.

MFI:
45

MFI is money flow index. IF MFI is>80 then sell signal occurs and if MFI is <20, then
buy signal occurs. In the above chart, the red circled points are those where MFI
crosses 80 benchmark and hence generated sell signal. The green circled points are
those points where MFI is <20 and generated bullish signal for the investor.
The bottom picture shows MSI+ RSI together. The red circle is the point where MFI and
RSI both crosses their upper limit and hence give sell signal. The green circle shows the
opposite case. Together they are strong predictor.

Moving Average:
46

The orange colored line is the less smooth line (15 day moving average), the blue
colored line is the more smooth line (25 day moving average). The 1 st and 2nd sell signal
points are those points where the less smooth line crosses over the more smooth line.
From these points the price started to fall. On the other hand, the 1 st, 2nd and the 3rd buy
signal points are those points where the less smooth line crosses the more smooth line
from underneath. As a result, price increased.

Exponential Moving Average:

47

Both of the charts are of EMA indicator. The green signal line is the EMA, the blue line is
the DEMA and the purple line is the TEMA indicator. EMA<DEMA<TEMA is the
sequence of smoothness. That means Green colored line is the least smooth line of the
three. In the both graphs, when these green line crossed the two other line from below,
then the bullish signal generates. On the other hand, when the least smooth green line
48

crossed over the other two lines from top then the bearish signal generates. These are
the sell signal.

MACD:

The orange colored line is the MACD line and the blue colored line is the MACD single
line. MACD is less smooth than the MACD single line. The red circles are the points
where the MACD line (the less Smooth line) crosses over the MACD single line from the
top. These are the bearish singles. In contrast, the green circle points are the points
where the MACD line crosses the MACD single line from the bottom. That means the
less smooth line crosses over the more smooth line from the bottom part. The result is
the price started to increase. These are bullish single.

OBV:

49

On balance volume indicator works well for this price pattern. When the price moves up,
the on balance volume moves up as well. When the price moves down, the on balance
volume indicator moves down. The black and red circled portions of the graph shows
that both the price and on balance volume move together.

ROC:

Rate of change (ROC) indicator works well for this price pattern. ROC moves in similar
way of the price throughout the year. When the price goes down ROC goes down at the
50

same time. On the other hand, when the price increases, the ROC indicator increases
at the same time. This pattern works throughout the year.

Stochastic Oscillator:

There are two graphs of stochastic oscillator. Stochastic %K is the orange colored line,
Stochastic %D is the blue colored line. Stochastic %K is the less smooth line and
Stochastic %D is the more smooth line. When the less smooth line crosses the more
smooth line from the top, the price declined. These are the sell signals. On the other
hand, when the less smooth line crosses the more smooth line from underneath the
bullish signal occurs. This happens in the later graph also.

51

52

Last 6 month: the lowest price was in October at tk.29 .4 and the highest in February at
tk. 49
Last 1 year: the lowest was the one of October at tk. 29.4 (shown in 6 month analysis),
the highest price is tk. 52 in February.

53

Last 3 years: the lowest price is tk. 29.4 of October and the highest one the company
experienced is at tk. 137.8 at January 2013.

54

Appendix
Calculation of Free Cash Flow Model
Income Statement

55

Balance Sheet

Number of outstanding shares

591540246

56

Calculations

57

58

Pro Forma Income Statement

59

Pro Forma Balance Sheet

60

Beta Calculation
Date
30-12-2012
29-11-2012
31-10-2012
30-09-2012
30-08-2012
30-07-2012
28-06-2012
31-05-2012
30-04-2012
29-03-2012
29-02-2012
31-01-2012
29-12-2011
30-11-2011
31-10-2011
29-09-2011
25-08-2011
31-07-2011
30-06-2011
31-05-2011
28-04-2011
31-03-2011
28-02-2011
31-01-2011
30-12-2010
30-11-2010
31-10-2010
30-09-2010
31-08-2010
29-07-2010

Stock Monthly
Closing
53.30
49.40
54.80
58.00
65.70
49.50
57.30
60.20
70.80
70.60
75.80
55.50
74.40
78.80
75.70
93.60
90.70
100.40
81.50
80.50
81.90
117.60
95.80
132.30
140.10
148.50
150.40
143.30
144.90
136.50

Index Monthly Closing

4,219.31
4,210.58
4,493.92
4,544.41
4,446.87
4,159.17
4,572.88
4,734.33
5,098.90
4,990.32
4,695.41
4,153.96
5,257.61
5,268.55
5,036.50
5,910.20
6,212.00
6,459.62
6,117.23
5,758.26
6,050.85
6,352.10
5,203.08
7,484.23
8,290.41
8,602.44
7,957.12
7,097.38
6,657.98
6,342.76

Excess Stock
Returns
0.078947368
-0.098540146
-0.055172414
-0.117199391
0.327272727
-0.136125654
-0.048172757
-0.149717514
0.002832861
-0.068601583
0.365765766
-0.254032258
-0.055837563
0.040951123
-0.191239316
0.031973539
-0.096613546
0.23190184
0.01242236
-0.017094017
-0.303571429
0.227557411
-0.275888133
-0.055674518
-0.056565657
-0.012632979
0.049546406
-0.011042098
0.061538462
0.019988791

61

Exces
Retur
0.002
-0.063
-0.011
0.021
0.069
-0.090
-0.034
-0.071
0.021
0.062
0.130
-0.209
-0.002
0.046
-0.147
-0.048
-0.038
0.055
0.062
-0.048
-0.047
0.220
-0.304
-0.097
-0.036
0.081
0.121
0.065
0.049
0.030

Date
30-06-2010
31-05-2010
29-04-2010
31-03-2010
28-02-2010
31-01-2010
30-12-2009
26-11-2009
29-10-2009
30-09-2009
31-08-2009
30-07-2009
30-06-2009
19-05-2009
30-04-2009
31-03-2009
26-02-2009
29-01-2009
30-12-2008
30-11-2008
30-10-2008
25-09-2008
31-08-2008
31-07-2008
30-06-2008
29-05-2008
30-04-2008
31-03-2008
28-02-2008
31-01-2008

Stock Monthly
Closing
133.825
138.25
126.825
140.825
131.4
132.025
121.1
134.525
132.575
130.8
125.6
132.15
138.125
123.175
130.625
108.9
86.875
93.075
96.6
59.225
69.275
73.225
58.65
58.975
61.75
81.95
77.55
85.75
93.525
161.9

Covariance
Variance of market
return
Beta
Market return
Market return -yearly

Index Monthly
Closing
6,153.68
6,107.81
5,654.88
5,582.33
5,560.56
5,367.11
4,535.53
4380.94806
3364.26191
3083.88603
2941.28356
2914.53373
3010.26379
2572.18032
2554.3553
2446.92225
2570.96409
2649.49425
2795.34
2468.91845
2748.59773
2966.81815
2791.2
2761.05
3000.49
3167.99
3072.85
3016.489
2931.38
2907.166

Excess Stock
Returns
-0.032007233
0.090084762
-0.099414167
0.071727549
-0.004733952
0.090214699
-0.099795577
0.014708655
0.013570336
0.041401274
-0.049564888
-0.043257919
0.121372032
-0.057033493
0.199494949
0.25352518
-0.066612947
-0.036490683
0.631067961
-0.145073981
-0.053943325
0.248508099
-0.00551081
-0.044939271
-0.246491763
0.056737589
-0.095626822
-0.083132852
-0.422328598

Excess Market
Returns
0.007510057
0.080095422
0.012996365
0.003915073
0.036043606
0.183347463
0.035285445
0.302201843
0.090916421
0.048483075
0.009178082
-0.03180122
0.170316003
0.006978285
0.04390538
-0.048247208
-0.029639679
-0.052174601
0.132212366
-0.101753442
-0.073553689
0.062918512
0.010919759
-0.079800299
-0.052872642
0.030961485
0.018684305
0.029033766
0.008329074

0.009143263
0.009217109
0.991988151
0.010937228
0.13124674

WACC Calculation
62

Risk-free rate
Market return
Beta
Cost of equity
Cost of debt

Total market value of

equity
Book value of debt
Weight of equity
Weight of debt

WACC

0.0725
0.13124674
0.99198815
1
0.13077607
0.20429343
8

315290951
12
299303024
5
0.91330110
1
0.08669889
9
0.13714994
5

Change in Working Capital

63

Free Cash Flow Valuation

Items
Net income

2013

2014

2015

3,542,007,021

4,960,652,16
9

6,845,821,962

257,468,089

297,573,234

344,623,210

2,331,229,277

2,734,917,99
1

3,208,511,703

(2,657,990,063
)

(497,653,814) (679,701,833)

4,126,235,895

3,020,961,22
6

4,661,635,302

0.879

0.773

0.680

3,628,576,788

2,336,198,18
3

3,170,188,527

Depreciation
Capital Expenditure

Change in NWC

Free Cashflow
4,801,484,361

Present value discount factor

Present value of free cashflow

Terminal value
30,474,063,08
9
Enterprise value
39,609,026,58
7
Cash
2,399,159,338
Interest-bearing debt
2,993,030,245
Equity value
39,015,155,68
0
64

Value per share

66

Dividend Discount Model

2008
2009
2010
2011
2012
Averag
e

Dividend Payout
Ratio
0.2
0.25
0.3
0.25
0.2

Retention
Rate
0.8
0.75
0.7
0.75
0.8

ROE

EPS

13.95
12.67
17.78
27.28
23.2

2.97
3.14
3.96
5.08
3.8

0.24

0.76

18.97
6

Growth

14.42176

1. changing growth model

assumed g
2013
1.1

dividend k
2.53
1.131

2014

1.1

2.783

1.131

2015

1.1

3.0613

1.131

2016

1.07

1.131

2017

1.07

2018

1.07

2019

1.04

2020

1.04

3.27559
1
3.50488
2
3.75022
4
3.90023
3
4.05624

1.131
1.131
1.131
1.131

value
2.23695
8
2.17564
5
2.11601
2
2.00188
6
1.89391
5
1.79176
7
1.64760
2
1.51503
65

2021

1.04

2022

1.02 onwards

Price

2. continuous growth model

g
Price

2
4.21849
2
4.30286
2

1.131
1.131

6
1.39313
7
42.6025
9
59.3745
5
assume
d
2.50%

47.15

Relative Valuation

66

67

68