2.
0 COMPANY OVERVIEW
Dutch Bangla bank is a scheduled joint venture private commercial bank which embarked on
its journey on June 3, 1996 with an objective of financing high-growth manufacturing
industries, fulfilling customer needs andto become their first choice in banking.
Consequently, over time DBBL introduced E Banking, Mobile Banking, Remittance
Services, Agent Banking Activities, SME banking etc. and it is currently Bangladesh’s most
technologically advanced bank. Besides, DBBL operates the nation's largest ATM fleet of
4,930 ATMs installed all over the country. The Bank is listed with the Dhaka Stock
Exchange Limited and Chittagong Stock Exchange Limited. It is worth mentioning that
DBBLis the pioneer of the Corporate Social Responsibility (CSR) sector and has made
massive donation in the fields of education, women empowerment, disability, environment
and other social welfare sectors. In 2007, the bank won the Bangladesh Business Awards for
being the 'Best Financial Institution' for its commitment to technology and community
service.
2.1 Company Quality Assessment
The first and foremost step of stock valuation is to assess the business quality i.e.
the industry’s structural attractiveness
The degree of the company’s financial stability and economic performance
Its sustainable competitive advantage
Basically, through this assessment it is possible to determine what a company
is doing that allows it to earn excess returns of capital in comparison to its
competitors.
As far as DBBL is concerned, in its 23 years of existence, it has epitomized the
banking landscape of Bangladesh with its innovation, integrity and inclusive Banking
& Financial Services.
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2.1.1 Financial Performance of DBBL
For the past 5 years, DBBL’s financial performance can be summarized as
follows-
Table 01: Financial Performance in terms of Revenue
2018 Revenue(Taka In Million) 29215.5
2017 23550.5
2016 21333
2015 21849
2014 20741.8
0 5000 10000 15000 20000 25000 30000 35000
Source: Compiled by the assignee from the annual reports of banks
That is, although the economy of Bangladesh showed ups and down in year 2018 due to
significant challenges in liquidity management and currency fluctuation, DBBL managed to
increase its revenue and net profit.
Table 02: Financial Ratio Analysis
Financial 2018 2017 2016 2015 2014
Ratios (%)
Gross profit 24.7 24.1 25.9 29.4 25.7
Ratio
Debt Equity 50.1 39.6 20.9 26.3 32.1
Ratio
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Loan 76.8 75.6 79.4 81.5 74.6
deposit ratio
Return on 6.9 7 8 10.4 10.8
average
investment
(ROI)
Return on 1.3 0.9 0.7 1.3 1.1
average
assets
Source: Compiled by the assignee from the annual reports of banks
2.1.2 Sustained credit rating:
The Bank has been able to sustain its credit rating at ‘AA1’ in the Long Term
and ‘ST-1’ in the Short Term for the consecutive 7 years from 2011 to 2017.
Also, it has first time been rated by renowned international rating agency
“Moody's” and was awarded rating grade “Ba3” by stable outlook.
3.0Process of Stock Valuation
Stock valuation refers to the process of determining the intrinsic value of a share of common
stock of a company. By knowing a stock’s intrinsic value, an investor may determine whether
the stock is over- or under-valued at its current market price and thereby make informed
decisions about trading.
The steps that have been followed in the process are-
3.1 Analysis of Share information of DBBL
An investor will then identify the key economic variables most likely to
impact the trading outcome and research historical share information of the
company. In this way, the future financial scenario can be somewhat
estimated.
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Table 03: Share Information of DBBL from 2014-2019
Share 2018 2017 2016 2015 2014
information
Number of 200,000 200,000 200,000 200,000 200,000
outstanding
share
Earnings 21 12.3 8.9 15.1 11
Per Share
(Taka)
Market 144.4 153.1 116.7 107.6 105.8
Price Per
Share
Dividend 4.00 3.00 3.00 4.00 4.00
Per Share
Source: Compiled by the assignee from the annual reports of banks
This indicates that Earning per Share has increased by 90% (approximately) from the year
2014-2018 and by 70% from 2017 to 2018. Thus, the stocks of DBBL are lucrative for the
investors to a great extent.
Table 04: Earnings Per Share of DBBL
25
Earnings Per Share(Taka)
20 21
15 15.1
12.3
1011
8.9
5
0
2014 2015 2016 2017 2018
Year
Source: Compiled by the assignee from the annual reports of banks
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3.2 Determining the intrinsic value of stock
3.2.1 Determining the measure of systematic risk (Beta)
Beta measures the exposure of risk of a particular stock or sector in
relation to the market. It is an indicator of systematic risk. A β of less
than 1 indicates that the security is less volatile than the market as a whole
and vice versa.
In determining Beta for the DBBL stock-
I. At first, we input the monthly adjusted closing price for both DBBL stock and the
market (the market index) from the year 2014-2018. Since time frame is five years,
we have 60 (5x12=60) data sets.
II. Next we determine the monthly return on both stocks.
III. Plotting DBBL monthly return on y-axis and market monthly return on x-axis, we
draw the Security Characteristic line to determine Beta.
f(x) = 0
BETA FOR DBBL
12
10
DBBL Monthly Returns
0
0 2 4 6 8 10 12
Market Monthly Returns
IV. Here, β is the slope of the SCL i.e.β=DBBL monthly return/Market Monthly
Return=0.895. That is, the stock is considered less risky, but will likely
offer low returns as well.
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V. Average of the monthly return is found out and is multiplied by 12 for achieving the
annual market return (Rm) which is 10.15%.
VI. As per Bangladesh Bank, the Risk-free return (Rf)for the time period October-2015
to October-2020 is 7.35%.
VII. We determine the risk premium= Rm-Rf = 10.15%-7.35%=2.8%
VIII. Lastly, we calculate the required return (Ke) usingthe following formula-
Required Rate of Return = Rf + ß(Rm – Rf)
=7.35 %+( 0.895x2.8%) =9.86%
3.2.2 Application of Constant/Gordon Growth Model: This
model is based on the assumptions that-
Dividend growth rate is constant over the years.
This growth rate (g) must be smaller than the discount rate (Ke).
Dividend amount and the stock’s fair value will grow at a constant
rate.
The formula is,
D
Value of Stock=¿
K −g
Where,
D=Expected Dividend per Share
K=Required rate of return/discount rate
G=Growth Rate
The above hypothesis are only applicable for a stable business that is
not expected to change its operations, or move to a different business.
Since DBBL has been in the banking sector only for the last 24 years,
it can be assumed that Gordon Growth Model is the right fit for its
stock valuation. Also, the growth rate can be estimated from the macro
data of DBBL.
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3.2.3 Determining the estimated growth rate
The following information has been collected from the Annual
Report of DBBL over the years-
Table 04: Estimated Growth rate of Dividend of DBBL
Year Dividend Per Share Dividend Rate (%) Yearly dividend
( Taka) growth rate (%)
2019 3.4 40 5.263
2018 4 38 26.667
2017 3 30 0.00
2016 3 30 -25.00
2015 4 40 0
2014 4 40 _
Source: Compiled by the assignee from the annual reports of banks
Next we plot the yearly dividend growth rate on a graph to figure out our growth rate for the
particular stock.
Yearly Dividend Growth Rate(%)
30.
20.
10.
0.
-10....
-20....
-30.... Year
It is observed that in the initial phase, the company has had almost no growth.
But during 2018, the growth has been tremendous. But the average growth
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revolves around approximately 5%. Hence, it is safe to assume the growth rate
to be: g= 4.86%.
3.2.4 Determining the value of stock
As mentioned before, we utilize the Gordon Growth Model in this
case.
3.4 (1+ 0.0486)
Value of Stock=
9.86 %−4.86 %
=71.2
4.0CONCLUSION
The intrinsic value of stock is BDT 71.2 whereas the current market price of stock
stands at BDT 68.2. This indicates that it is an undervalued stock (Intrinsic
Value>Current market price). In this scenario, the investors should rush to buy the
stock. This would drive the price up and expected return down.
