Table of Contents

Introduction ......................................................................................................................................3
Absolute Valuation Models:...................................................................................................................... 4
Relative Valuation Models: ....................................................................................................................... 5
Why an investor does valuation?.............................................................................................................. 5
Company Analysis ..............................................................................................................................7
Key Product Offering................................................................................................................................. 8
Prospects of the Major Product Line In The Future.................................................................................. 8
Generic Strategy –Cost Leadership ........................................................................................................... 8
Major Risks of the Business Model and Risk Management ...................................................................... 8
Value Chain ............................................................................................................................................... 9
Financial Performance Indicators ............................................................................................................. 9
Industry Analysis.............................................................................................................................. 12
Industry Lifecycle .................................................................................................................................... 13
Effect on the Valuation Variables ........................................................................................................... 13
Economic Analysis............................................................................................................................ 15
GDP ......................................................................................................................................................... 16
Inflation ................................................................................................................................................... 17
Consumer Confidence ............................................................................................................................. 17
Effect on the Valuation Variables ........................................................................................................... 18
Valuation ......................................................................................................................................... 19
Residual Earnings (RE) approach: ........................................................................................................... 20
Limitations: ......................................................................................................................................... 20
Key assumptions: ................................................................................................................................ 21
Valuation: ............................................................................................................................................ 22
Free Cash flow approach: ....................................................................................................................... 23
Limitations: ......................................................................................................................................... 23
Assumptions:....................................................................................................................................... 23
Valuation: ............................................................................................................................................ 24
Free Cash flow (approximation) approach: ............................................................................................ 25
Limitations: ......................................................................................................................................... 25
Key assumptions: ................................................................................................................................ 25

1
 Valuation: ............................................................................................................................................ 26
Dividend Discount Model (DDM) approach: ........................................................................................... 27
Limitations: ......................................................................................................................................... 27
Relative Valuation approach: .................................................................................................................. 27
Price-Earnings ratio (P/E): ................................................................................................................... 27
Price to Book Value (P/B) ratio: .......................................................................................................... 28
Price-sales ratio (P/S): ......................................................................................................................... 28
Price-Cash flow ratio (P/CF): ............................................................................................................... 28
Limitations: ......................................................................................................................................... 28
Key assumptions: ................................................................................................................................ 29
Weighted average Valuation: ................................................................................................................. 29
Conclusion ....................................................................................................................................... 30

2
3
A valuation is the process of determining the current worth of an asset or company. There are many
techniques that can be used to determine value, some are subjective and others are objective. Items that are
usually valued are a financial asset or liability. Valuations can be done on assets (for example, investments
in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents
and trademarks) or on liabilities (e.g., bonds issued by a company). Valuations are needed for many reasons
such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting,
taxable events to determine the proper tax liability, and in litigation.

Absolute Valuation Models:

The defining characteristic of an absolute valuation model is that in this model the value of the
asset is derived only on the basis of characteristics of that asset. There is no consideration regarding
the valuation of other comparable assets that are trading in the marketplace. These models are
basically known as the “discounted cash flow” of the DCF models. These models are widely used
across the industry.

There are several subtypes of discounted cash flow models which we will discuss now:

a. Dividend Discount Models: Discounted dividend models assume that the shareholders of
the firm are only entitled to its dividends. Thus, these models assume the purchase price of
the share as the initial negative cash outflow and then assume that dividends that will be
received throughout the life of the firm are the positive cash flows. Based on the dividends
that are expected to be received later, it is decided whether an investment is worthwhile
given its current market price.

b. Discounted Free Cash Flow Models: The discounted free cash flow models differ from
the discounted dividend models in the sense that a broader concept of cash flows is being
used. These models look at the total cash flow that will accrue to the firm. Then they
subtract the amounts that are owed to outside parties like government, bondholders etc.
They balance amount is considered free cash flow to the firm. This is projected for several
years and then discounted to arrive at the valuation of the firm.

c. Discounted Residual Income Models: Discounted residual income models look at an

even broader concept of cash flows. They just consider all the cash flows that accrue to the

4
 firm post the payment to suppliers and other outside parties. Payments due to bondholders
and preference shareholders are also not subtracted from the total. The residual cash flow
is then discounted to arrive at the valuation of the firm.

d. Discounted Asset Models: A slightly different absolute valuation model is the discounted
asset model. In this case, the valuation is conducted based upon the market value of the
assets that the firm currently owns. The present value of each asset is derived and then all
the values of all the assets are added up to come up with a value for the entire corporation.
This method does not take into account the synergy between the assets. As such, it can only
be used for commodity businesses which involve oil, coal or other such natural resources.

Relative Valuation Models:

A relative valuation model is a business valuation method that compares a firm's value to that of
its competitors to determine the firm's financial worth. Relative valuation models are an alternative
to absolute value models. Relative valuation models are different from discounted cash flow
models. They are different in the sense that they do not value a firm or an asset based on what its
intrinsic value is. Rather, these models believe that the market may be wrong about a given stock.
However, for an industry in general the market is right.

Why an investor does valuation?

In finance, valuation analysis is required for many reasons including tax assessment, wills and
estates, divorce settlements, business analysis, and basic bookkeeping and accounting. Since the
value of things fluctuates over time, valuations are as of a specific date like the end of the
accounting quarter or year. They may alternatively be mark-to-market estimates of the current
value of assets or liabilities as of this minute or this day for the purposes of managing portfolios
and associated financial risk (for example, within large financial firms including investment banks
and stockbrokers).

Some balance sheet items are much easier to value than others. Publicly traded stocks and bonds
have prices that are quoted frequently and readily available. Other assets are harder to value. For
instance, private firms that have no frequently quoted price. Additionally, financial instruments
that have prices that are partly dependent on theoretical models of one kind or another are difficult

5
to value. For example, options are generally valued using the Black–Scholes model while the
liabilities of life assurance firms are valued using the theory of present value. Intangible business
assets, like goodwill and intellectual property, are open to a wide range of value interpretations.

It is possible and conventional for financial professionals to make their own estimates of the
valuations of assets or liabilities that they are interested in. Their calculations are of various kinds
including analyses of companies that focus on price-to-book, price-to-earnings, price-to-cash-flow
and present value calculations, and analyses of bonds that focus on credit ratings, assessments of
default risk, risk premium, and levels of real interest rates. All of these approaches may be thought
of as creating estimates of value that compete for credibility with the prevailing share or bond
prices, where applicable, and may or may not result in buying or selling by market participants.
Where the valuation is for the purpose of a merger or acquisition the respective businesses make
available further detailed financial information, usually on the completion of a non-disclosure
agreement.

6
7
Key Product Offering
Malek Spinning Mills Limited produces 100% export oriented Knit Yarn. The product offering of
the three subsidiaries is given below:

Salek Textile Limited- A composite mill of the Textile sector with three operational units. The
rotor unit produces open end yarn of various counts. The fabric unit produces denim fabric of
various size and grade. The RMG unit produces denim products.

J.M. Fabrics Limited- A knitting, dyeing, finishing and garments factory

Newasia Synthetics Limited- A project promoted for setting up a polyester staple fiber and chips
plant the implementation of which has since been kept in abeyance due to non-availability of
energy/fuel & gas.

Prospects of the Major Product Line In The Future

There is a moderate possibility that Malek Spinning Mills Limited will enter into a new product
line out of their current product offering. There is a possibility that Malek Spinning Mills Limited
will enter into the RMG sector but that scenario is highly dependent on the success of the Salek
Textile Limited’s RMG unit. The possibility of starting the operation of the Newasia Synthetics
Limited is moderately high due to the current focus of governments development projects in the
energy/ fuel & gas sectors.

Generic Strategy –Cost Leadership

The generic strategy of the Bangladesh textile industry is cost leadership with decent product
quality. Bangladesh textile industry is characterized by technologically slower compared to the
textile industry of other countries like China, India, South Korea etc. As for Malek Spinning Mills
Limited the key strategy followed is the cost leadership. To compete with the world class producers
of yarn around the world the company has to offer products with decent quality and with the lowest
possible cost. Malek Spinning Mills Limited thrives to reduce its cost of production and other
operational cost and increase its efficiency to provide a world-class competitive price.

Major Risks of the Business Model and Risk Management

Bangladesh is the 2nd largest exporter of RMG product and depend on domestic supply of quality yarn.
Spinning mill is labor oriented industry. Since Bangladesh does not produce enough basic raw materials
i.e. cotton, so the company has to depend largely on imported raw cotton and supply of skilled labor.

8
The major risk area for the company is to maintain a competitive lead time of its products. The lead time
is dependent of various factors:

(a) Import of raw materials

(b) Labor relations
(c) Labor productivity
(d) Energy
(e) Financial costs
(f) Political Turmoil

The company is trying to find alternative ways for sourcing raw materials. Bangladesh is not self-sufficient
for the production cotton. For that reason almost all of the textile industry manufacturers are dependent
on the imported cotton for their production. The company tries to minimize its risk of importing raw
materials by diversifying its supplier base.

Value Chain
The company is mainly dependent on the imports for its raw material sourcing. The main raw
material for the production of the company is cotton. Most of the cotton is imported from India,
China, and Pakistan etc. The raw materials are then put into the processing section of spinning and
the final out yarn is then sold to the garment manufacturers (weaving and knitting companies).

Natural Fibers Yarn Garment

(Domestic Supply/ Manufacturers
Import)
•Cotton, Wool, Silk •Spinning •Prime Contarctors
•Sub COntractors

Figure: Malek Spinning Mills Limited Value Chain

Financial Performance Indicators

Liquidity Position: Current ratio and quick ratio showed increasing trend over the years. Both the
current assets and current liabilities fluctuated over time yet the current assets were higher than
current liabilities over the time.

9
Operating Efficiency: The Company increased its operating efficiency by reducing days of sales
outstanding from 145.02 days in 2012 to 124.14days in 2015. However, the overall days of sales
outstanding shows a fluctuating trend which means the company is quite inefficient in collecting
its accounts receivable. The extreme value in 2013 which is 152.30 indicates that company was
taking longer to collect money. Total assets and fixed assets turnover showed an increasing trend
after decline in 2012. Meanwhile, growth of total assets and fixed assets compared to that of sales
generated gradually increasing the asset turnover ratios.
Profitability: The profit margin exhibited mixed trend while ROE and ROA remained same in the
latest period. Since the growth rate of total sales increased than that of net profit, it decreases the
net profit margin after 2013. There is a negative net profit margin ratio in 2012 due to a net loss.
Decomposition of ROE: To get better insights on Return on Equity (ROE) we conducted DuPont
analysis and measured the sensitivity of each component. As it can be seen, net profit margin
fluctuated little whereas financial leverage decreased over the time. Meanwhile, total asset
turnover displayed increasing tendency.
Leverage & Coverage Ratios: The debt ratios shows mixed results. In 2012 the debt ratios were
high due to the financial crisis. However, the ratios declined in the following years and increased
in 2015. The increase in total debt to total asset ratio in the latest year is due to an increasing
growth in debt than the total asset. The market price of the company showed a negative growth
trend over time which is higher than negative growth rate of the earning per share. This caused a
declining Price/Earnings ratio over time. And the book value of the company fluctuated over the
period. The decrease in Market/ Book value ratio in the latest year was due to a higher declining
in the market price than the book value.

10
 Ratio 2011 2012 2013 2014 2015
Liquidity
Current ratio 1.25 1.42 1.41 1.43 1.68
Quick ratio 0.58 0.78 0.79 0.74 0.90
Operating Efficiency
Inventory Turnover Ratio 1.51 2.02 1.35 1.07 1.02
Days of Sales Outstanding 104.72 145.02 152.30 122.52 124.14
Total Asset Turnover 0.62 0.43 0.50 0.53 0.54
Fixed Asset Turnover 1.40 0.70 0.90 0.98 0.98
Profitability Scenario

Net Profit Margin (NPM) 0.03 (0.04) 0.06 0.05 0.05

Return on Total Assets (ROA) 0.02 (0.02) 0.03 0.03 0.03
Return on Equity (ROE) 0.04 (0.03) 0.06 0.05 0.05
Components of ROE

Net Profit Margin 0.03 (0.04) 0.06 0.05 0.05

Total Assets Turnover 0.62 0.43 0.50 0.53 0.54
Financial Leverage 2.22 1.71 1.84 1.77 1.77
ROE 0.04 (0.03) 0.06 0.05 0.05
Leverage & Coverage Ratios

Debt to Asset 0.10 0.15 0.14 0.11 0.16

Debt to Equity 0.22 0.25 0.25 0.20 0.29
Price/Earnings(P/E) Ratio 18.90 (17.46) 9.55 8.21 7.66
Market/Book value Ratio 1.07 0.54 0.62 0.42 0.35
Figure: Ratios of Malek Spinning Mills Limited

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12
Bangladesh’s Textile sector outlook projects a bright future as close competitors like China are
moving up the value chain, leaving value apparel manufacturing to cost effective players like
Bangladesh.

Industry Lifecycle
Bangladesh textile industry is in the shakeout point of the industry life cycle. The shakeout point
is situated in between growth stage and maturity stage. It is the point where the industry starts to
become mature. The textile industry is facing expanding sales and earnings are growing but the
rate has slowed from the growth stage. Gradually the rate of sales expansion is moving towards
the growth rate of the economy. There is competition among the industry participants to grab a
share of the market. Some of the firms are competing on quality to separate their product from
other lower-cost offerings, and most of the firms are trying a low-cost/low-price strategy to
increase the volume of sales and make profits from inventory turnover.

Shakeout Point

Figure: Textile Industry Lifecycle

Effect on the Valuation Variables

The industry pattern suggest that the textile industry will grow at a stable rate in the future periods.
The growth rate at the beginning may be higher compared to the later periods as the industry will
slowly move towards its maturity. Cost structure of the industry indicates that as the industry
moves towards the maturity it will reach economies of scale gradually which will reduce the cost
of production. The industry is very much prune to the country’s political situation. Political turmoil

13
and other adverse situations hamper the industry’s revenues. For the forecasting period the political
situation of the country is expected to be stable.

14
15
GDP
Maintaining an impressive track record on growth and development the economy of Bangladesh
has grown nearly 6% per year in the past few decades. Maintaining an impressive track record on
growth and development the economy of Bangladesh has grown nearly 6% per year in the past
few decades. Bangladesh's real GDP growth is high at a five-year average of 6.3% compared with
the 'BB' category median of 4.3%. GDP growth has been remarkably stable over the years. Fitch
expects growth to reach 6.5% by FY2016 and FY2017. Bangladesh aimed to add 1.8 percentage
points to GDP growth each year. The World Bank (WB) has also forecasted economic growth of
Bangladesh for FY2016 at 6.5% on the basis of stronger consumption, export growth and political
stability. Moreover, South Asia will maintain its leading position as the fastest growing region in
the world, with economic growth rate of 7.4% in FY2016 compared with 7% in FY2015.

GDP Growth Rate in South Asian Countries

9
7.8
8 7.5
6.75
7 6.5 6.5
5.9
6 5.6
5.3
5
5 4.5
4.2
3.9 3.7
4 3.4
3.1
3
1.9
2

0
Afganistan Bangladesh Bhutan India Maldives Nepal Pakistan Srilanka

2015 GDP Growth (Actual) 2016 GDP Growth (Estimated)

(Source: World Bank)

16
Inflation
Inflation rate shows a decreasing trend in this year. Low prices of daily commodities in domestic
market with low-edible oil and sugar price in international market have cooled down consumer
prices. The point to point inflation rate in Bangladesh as of March, 2016 is 5.65% and for the
remaining of the year it is expected that it may have an upward trend but it will not cross 6% mark.

Inflation (Point to Point)

6.40% 6.36%
6.32%
6.27% 6.25%
6.30% 6.24%
6.19% 6.17% 6.19%
6.20% 6.14%
6.11%
6.10% 6.04% 6.05%

6.00%

5.90%

5.80%

Inflation (Point to Point)

(Source: Bangladesh Bank)

Consumer Confidence
Consumer spending has been used as a proxy for the consumer confidence in Bangladesh. The
growth of the consumer spending from 2007 to 2013 was thriving but due to the political instability
in the country the growth was negative 0.01% in the year 2014 but as the political situation is
thought to be stable in the future thus the consumer spending is gaining its momentum from the
year 2015 and it is expected that trend will be followed in the future years. The graph show that
the consumer confidence is increasing.

17
 Growth of Consumer Spending
30.00%
26.10%
25.00%

20.00%
16.47% 15.91% 15.28%
15.00% 13.44% 12.92% 13.69%
12.06%
10.67%
10.00%

5.00%

-0.01%
0.00%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-5.00%

Figure: Consumer Spending growth

Effect on the Valuation Variables

The stable growth rate of the country’s GDP and relatively steady expected inflation is anticipated
to result in a terminal rate of around 9%. The growth rate of the GDP also reflects that the future
growth rate of the industry as a whole has a potential of reaching a steady rate. Country risk
premium calculated from the S&P Emerging Market Equity Index and it reflects the country risk
premium and incorporates the risk that arises from political situations.

18
19
Residual Earnings (RE) approach:
Residual income valuation is an approach to equity valuation that formally accounts for the cost
of equity capital. Here, “residual” means in excess of any opportunity costs measured relative to
the book value of Shareholders' equity; residual income (RI) is then the income generated by a
firm after accounting for the true cost of capital.

The underlying idea is that investors require a rate of return from their resources under the control
of the firm’s management, compensating them for their opportunity cost and accounting for the
level of risk resulting. This rate of return is the cost of equity, and a formal equity cost must be
subtracted from net income. Consequently, to create shareholder value, management must generate
returns at least as great as this cost. Thus, although a company may report a profit on its income
statement, it may actually be economically unprofitable; see Economic profit. It is thus possible
that a value deemed positive using a traditional discounted cash flow (DCF) approach may be
negative here. RI-based valuation is therefore a valuable complement to more traditional
techniques.

Using the residual income approach, the value of a company's stock can be calculated as the sum
of its book value and the present value of its expected future residual income, discounted at the
cost of equity, r, resulting in the general formula:

Limitations:
 The model is vulnerable to accounting manipulation by company management.
 The model requires that the analyst have sophisticated understanding of public financial
reporting, as large adjustments to report financials may be required.
 Similar to the previous point, the model requires a clean surplus relationship.
Discount rate calculation: The appropriate discount rate for RE approach is cost of equity. We
have assumed the risk free rate to 6.89%, which is the yield of 10 year Treasury bond. Beta for
Malek Spinning Mills Limited was 1.12. It is mainly calculated by incorporating the market return
and stock return. We have used the market and stock return data starting from the day, they were
listed in the DSE. The adjusted beta for this company is 1.08.

20
We used the current risk premium for equity market which is 6.25% to estimate the market risk
premium. To estimate the country risk premium we have converted the default spread. The
sovereign ratings default spreads for Bangladesh which is 3.99%. We have scaled up the default
spread to reflect higher risk of equity in the market. We have used the ratio of the S&P Emerging
Market Equity Index standard deviation to the BAML Emerging Public Bond index standard
deviation. In this case, the standard deviation for S&P Emerging Market Equity Index was 15.32%
and for BAML Emerging Public Bond index was 11%. As a result the relative volatility is 1.39.
So, the country risk premium is 5.56%. We have added the market risk premium with the country
risk premium to calculate the ERP. So the ERP is 11.81%.

Beta 1.123562018
Adjusted beta 1.082786552
risk free rate 0.0689
Country Risk premium 5.56%
Current risk premium for equity market 0.0625
Equity risk premium 11.81%

Cost of equity 0.196777092

Key assumptions:
 Terminal growth rate 9%
 Dividend payout ratio will be constant over the years
 Cost of equity will be constant over the years
 Forecasted revenue growth rate will be constant over the years

21
 Valuation:
BDT in Million
Particulars Time 0 FY 2015-16E FY 2016-17E FY 2017-18E FY 2018-19E FY 2019-20E
Revenue 8,834.79 9,406.42 10,015.03 10,663.03 11,352.95
Net profit margin 3.21% 6.19% 11.49% 20.35% 33.20%
Earnings 283.70 582.71 1,150.42 2,170.21 3,769.05
Dividend payout ratio 18.35% 18.35% 18.35% 18.35% 18.35%
Transfer to Equity 231.64 475.78 939.33 1,771.99 3,077.46
Book Value 8,679.05 8,910.69 9,386.48 10,325.81 12,097.80 15,175.26

Cost of equity 0.1968 0.1968 0.1968 0.1968 0.1968

Benchmark income 1,707.84 1,753.42 1,847.04 2,031.88 2,380.57
Residual income -1,424.14 -1,170.71 -696.62 138.33 1,388.48
Year 1 2 3 4 5

PV of discount factor 0.84 0.70 0.58 0.49 0.41

PV of residual income -1,189.98 -817.38 -406.40 67.43 565.55
Summation of PV of residual
income -1,780.78
Terminal growth rate 0.09
Continuing value 14,173.84
PV of terminal value 5,773.26
Book value of equity - existing
value 8,679.05
Equity value 12,671.53
Number of shares outstanding 193.60 Million
Value per share 65.45 Undervalued

Since the current market price is BDT 15.60 per share and the intrinsic value is BDT 65.45
per share, the stock is undervalued and should be bought.

22
Free Cash flow approach:
Free cash flow is a measure of financial performance calculated as operating income minus change
in net operating assets. Free cash flow represents the cash that a company is able to generate after
laying out the money required to maintain or expand its asset base.

Limitations:
 Free cash flow does contradict with matching principle.
 This model is not suited to short term investing. It focuses on long term value.
 Depending on what one believe about how a company will operate and how the market
will unfold, this valuation can fluctuate widely.
 If the inputs- free cash flow forecasts, discount rates and perpetuity growth rates are wide
of the mark; the fair value generated for the company won’t be accurate.
Assumptions:
 We have arrived at operating profit margin based on tax adjusted figure of operating
income and considered the average of the former and sales growth to predict future
operating income.
 Terminal growth rate consideration is similar to RE approach.
 Weighted average cost of capital will be constant over the years.
 Forecasted revenue growth rate will be constant over the years.

Discount rate calculation: The appropriate discount rate for FCF approach is weighted average
cost of capital (WACC). The equity of Malek Spinning Mills Limited is BDT 8,679,053,244 and
debt is BDT 6,641,975,506. Their equity to value ratio is 57% and debt to value ratio is 43%. The
cost of debt (before tax) is 5.73%. The WACC is 13%.

23
 Equity 8,679,053,244.00
long term 2512915215
short term 4129060291
debt 6,641,975,506
total value 15,321,028,750
Tax rate 16.00%
WACC 13%
Equity/Value 56.65%
Debt/Value 43.35%

Cost of equity 0.196777092

Risk free rate 0.0689
beta 1.082786552
Equity risk premium 0.1181
Interest paid 380,668,943
cost of debt 0.057312609

Valuation:
BDT in Million
Particulars Time 0 FY 2015-16E FY 2016-17E FY 2017-18E FY 2018-19E FY 2019-20E
Revenue 8,834.79 9,406.42 10,015.03 10,663.03 11,352.95
Operating Profit Margin 10.83% 12.89% 16.65% 23.53% 36.12%
Operating income 956.99 1,212.56 1,667.79 2,509.27 4,100.40
NOA 11,140.60 10,436.47 10,046.33 10,482.97 11,960.35 14,862.24
Change in NOA -704.12 -390.14 436.64 1,477.38 2,901.88
FCF 1,661.11 1,602.71 1,231.15 1,031.88 1,198.51
Year 1 2 3 4 5
PV of discount factor 0.88312617 0.779911833 0.68876055 0.608262467 0.537172503
PV of FCF 1,466.97 1,249.97 847.97 627.66 643.81
Summation of PV of FCF 4,836.38
Terminal growth rate 0.09
Continuing value 30,853.72
PV of terminal value 16,573.77
Enterprise value 21,410.15
Less: Interest bearing
debt 3,313.48
Equity value 18,096.67
Number of shares
outstanding 193.60 Million
Value per share 93.47 Undervalued

24
Since the current market price is BDT 15.60 per share and the intrinsic value is BDT 93.47
per share, the stock is undervalued and should be bought.

Free Cash flow (approximation) approach:

Free cash flow is a way of measuring a business’s cash flow that it has to distribute among all the
securities holders of a corporate entity. The approximation formula is:

EBIT (1-tax rate)

+Depreciation
- Capital expenditure
-Change in NWC
=Free cash flow

Limitations:
 If the inputs used in calculation changed slightly, there can be large change in the value of
the company.
 It uses future cash flow which is difficult to predict and so the success of this valuation is
directly related to whether one can predict the future cash flows accurately or not.

Discount rate calculation: The appropriate discount rate for FCF(approximation) approach is
weighted average cost of capital (WACC). The process of calculating WACC is similar to the
earlier FCF approach.

Key assumptions:
 Terminal growth rate 9%
 Weighted average cost of capital will be constant over the years
 We have considered average tax rate (Tax paid/Earning before Tax) of the last five years
to reach at earnings before interest after adjusted taxed for the projected years.

25
 Valuation:
BDT in Million
Particulars Time 0 FY 2015-16E FY 2016-17E FY 2017-18E FY 2018-19E FY 2019-20E
EBIT 821.96 875.80 933.12 994.15 1,059.13
EBIT (1-tax rate) 760.87 810.71 863.77 920.27 980.41
Depreciation 10.76 10.80 10.85 10.90 10.95
Capital expenditure 41.93 44.64 47.53 50.61 53.88
Change in NWC 2,081.32 342.48 364.64 388.23 413.35
Free cash flow -1,351.61 434.40 462.45 492.33 524.13
Year 1 2 3 4 5
Present value discount factor 0.88312617 0.779911833 0.68876055 0.608262467 0.537172503
Present value of free cash
flow -1,193.65 338.79 318.52 299.46 281.55
Summation of PV of free cash
flow 44.68

Terminal growth rate 0.09

Terminal value 13,492.92
Present Value of Terminal
value 7,248.02
Enterprise value 7,292.70
Cash 531.61
Interest-bearing debt 3,313.48
Equity value 4,510.83
Number of shares
outstanding 193.60 Million
Value per share 23.30 Undervalued

Since the current market price is BDT 15.60 per share and the intrinsic value is BDT 23.30
per share, the stock is undervalued and should be bought.

26
Dividend Discount Model (DDM) approach:

The dividend discount model is a procedure for valuing the price of a stock by using predicted
dividends and discounting them back to present value. If the value obtained from the DDM is
higher than what the shares are currently trading at, the stock is undervalued.

Limitations:

 It cannot be used to evaluate stocks where companies do not have stable dividend policy.
 This model requires projections for long time horizons.
 It is built on the flawed assumption that the only value of a stock is the return on investment
it provides through dividends without considering capital gain component.
 DDM model ignores the effect of stock buybacks, effect that can make a vast difference
in regard to stock value being returned to shareholders.
Since, Malek Spinning Mills Limited does not have a stable dividend policy which is the key
consideration of using DDM approach, thus we did not go for valuation under DDM method.

Relative Valuation approach:

A relative valuation model is a business valuation method that compares a firm’s value to that of
its competitors to determine the firm’s financial worth. This approach is an alternative to absolute
value models, which tries to determine a company’s intrinsic worth based on its estimated future
free cash flow discounted to their present value.

Determination of the peers: Since Malek Spinning Mills Limited belongs to the textile industry
categorized under spinning mills, the peer firms are identified based on current market
capitalization. Companies more than BDT 1,000 million market capital are considered as peers.

Market Multiples:

Price-Earnings ratio (P/E):

The price-earnings ratio (P/E) is calculated by dividing current market price by the earnings per
share (EPS) of common stock. This ratio shows how much investors are willing to pay for per taka
of reported earnings of a firm.

 The higher P/E ratio indicates that market perceives the higher expected future earnings
relative to the current reported earnings, other things being equal.

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  It is also argued that other things held constant, firms with better growth prospects
have higher P/E ratios.

Price to Book Value (P/B) ratio:

The market-to-book value ratio is the ratio of market price of stock to book value per share.

 This ratio is also used as a proxy for financial distress of a firm. It is believed, market
perceives that a firm is facing financial distress when this ration is less than one and vice-
versa.

Price-sales ratio (P/S):

 The price-sales ratio (P/S) is calculated by dividing current market price by the sales per
share (EPS) of common stock. This ratio shows how much investors are willing to pay for
per taka of reported turnover of a firm.

 The higher the P/S ratio the more investors are willing to pay for the firm’s future expected
sales.

Price-Cash flow ratio (P/CF):

The price-cash flow ratio (P/CF) is calculated by dividing current market price by the cash flow
per share of common stock. This ratio shows how much investors are willing to pay for per taka
of reported cash flow generated from operation of a firm.

 The higher the P/S ratio the more investors are paying for future expected operating cash
flows generated by the company.

Limitations:
 Relative valuation only works when pricing mechanism is efficient which is rare in the real
world.
 It is sometimes arduous to find good peer firms and even if peer is found, it may not be
publicly listed.
 Any comparable’s negative multiple will provide erroneous result.
 Different relative valuation model can provide different relative price.

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Key assumptions:
 Only spinning companies are considered as peers.
 Efficient market.
Comparables P/E ratio P/BV ratio P/S ratio P/CF ratio
Matin spinning Mills Limited 9.094333569 0.936580886 1.864267178 8.032345741
Delta Spinners Limited 14.49320457 0.47823142 0.775260709 6.174577661
Makson Spinning Mills Limited 9.765458236 0.360924363 0.814219244 7.725413131
RN Spinning Mills Limited 12.60272648 0.840141128 1.832276195 7.051524914
Tallu Spinning Mills Limited 11.47869311 1.073545078 0.909836015 63.67728359
Average 11.48688319 0.737884575 1.239171868 18.53222901

Multiple Industry Average Malek's Number Malek's Value

Earnings 11.49 2.05 23.55401312
Book Value 0.74 44.83 33.07936549
Sales 1.24 42.86 53.11090627
Cash-flow 18.53 3.72 68.93989191
Average relative Value BDT 44.67

Since the current market price is BDT 15.60 per share and the relative value is BDT 44.67
per share, the stock is undervalued and should be bought.

Weighted average Valuation:

Valuation method Value Weight Weighted Value
FCF 93.47 35% 32.71608247
FCF(approximation) 23.30 30% 6.989927265
Residual Earnings 65.45 25% 16.36303181
Relative Valuation 44.67 10% 4.46710442
Weighted Average Value 60.53614596 Undervalued

Since the current market price is BDT 15.60 per share and the weighted average value by
incorporating all the methods by using weight in each method, is BDT 60.53 per share, the
stock is undervalued and should be bought.

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Limitation of the report: Although we have tried our level best to prepare a fault free report but
lack of professional knowledge was the key problem. In addition to that the availability of data
was also the main concern as some required data was not available. Furthermore, some calculations
in the financial statements was not explained properly in the notes section such as tax holiday
reserve. We put some assumptions in valuation in our limited knowledge which is also a major
concern is preparing the report.

Limitation of security valuation: There are many methods of stock valuation and none of them
are perfect. Therefore it is very difficult to determine the true value of the stock, giving one a false
sense of the stock's value. Furthermore, often times the market does not act rationally and therefore
may not correspond to even an accurate stock valuation.

Holistic framework for valuation: We believe that forward looking valuation model is more
vibrant in predicting future flows of the company. On the other hand, a perfect blend of forward
looking valuation model and trend analysis model could give us more confidence and reliance in
our projection about company’s financial health and help investors in taking better investment
decision.

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