VALUATION OF

UNITED POWER
GENERATION &
DISTRIBUTION
COMPANY LIMITED
 Valuation of United Power
Generation & Distribution Co. Ltd.

Analysis of Financial Investment

Course Code: F-307

Prepared for:
Khairul Alam Siddique
Lecturer
Department of Finance
Faculty of Business Studies
University of Dhaka

Prepared by:
Arafat Ahmed Nihal
ID: 23-037

Section: A
BBA 23rd Batch
Department of Finance

February 12, 2020

 Letter of Transmittal
February 12, 2020

Khairul Alam Siddique

Lecturer
Department of Finance
Faculty of Business Studies
University of Dhaka

Subject: Submission of Report ‘Valuation of United Power Generation and Distribution

Company Limited’

Dear Sir:

With great pleasure and honor I am submitting my report titled ‘Valuation of United Power
Generation and Distribution Company Limited’ prepared for the course ‘Analysis of
Financial Investment (F-307)’. The report contains different kinds of analysis and different
types of valuation models to find out whether United Power Generation and Distribution
Company Limited stock is worth buying or selling. Though this report has been prepared for
educational purpose, it will be an effective one to achieve the goal in practical field.

I have tried my level best to accommodate as much information and relevant issues as possible
and follow the instructions that you have given us.

I would like to thank you for providing us with the opportunity to prepare this report.

Sincerely yours,

------------------------------
Arafat Ahmed Nihal
ID: 23-037

Section: A
BBA 23rd
Department of Finance
University of Dhaka
 Table of Contents
Contents
Executive Summary.......................................................................................................................6
Global Economic Analysis............................................................................................................7
Global Economic Outlook...........................................................................................................7
Global Power Sector Outlook......................................................................................................7
Global Outlook: Bangladesh Perspective....................................................................................8
Macro-economic Analysis.............................................................................................................9
Population Growth.......................................................................................................................9
Per Capita Income Growth..........................................................................................................9
Money Supply and Inflation......................................................................................................10
Overall Investment Growth.......................................................................................................10
Industry Analysis.........................................................................................................................11
Bangladesh Power Industry at a Glance....................................................................................11
Industry Life Cycle....................................................................................................................11
Five Forces Analysis..................................................................................................................12
Growths and Trends...................................................................................................................12
Facilitating Renewable Energy Development.......................................................................13
Technology and Efficiency....................................................................................................13
Capacity-building of the Workforce......................................................................................13
Role of Policy-makers...........................................................................................................13
Company Analysis.......................................................................................................................14
SWOT Analysis.........................................................................................................................14
Porter’s Generic Strategies........................................................................................................15
BCG Matrix...............................................................................................................................15
Ansoff Matrix............................................................................................................................16
Investment Positives..................................................................................................................16
Investment Negative..................................................................................................................16
Company Valuation.....................................................................................................................17
Assumptions and Notes.............................................................................................................17
Calculations...............................................................................................................................17
Beta and WACC Estimation......................................................................................................21
Change in Working Capital.......................................................................................................22
 Discounted Cash Flow Valuation...........................................................................................22
Dividend Discount Model Valuation......................................................................................23
Sustainable Growth Calculation............................................................................................23
Zero Growth Model...............................................................................................................23
Constant Growth Model........................................................................................................23
Weighted Average.................................................................................................................24
Relative Valuation...................................................................................................................24
P/E Ratio Valuation...............................................................................................................24
P/B Ratio Valuation...............................................................................................................24
P/S Ratio Valuation...............................................................................................................25
Weighted Average.................................................................................................................25
Final Decision...........................................................................................................................26
Appendix.......................................................................................................................................27
Pro Forma Income Statement....................................................................................................27
Pro Forma Balance Sheet...........................................................................................................27
 Executive Summary
First of all, analysis of global economy showed a forecast of 2.6% growth in the coming years. A
macro-economic analysis of Bangladesh indicated that with the increasing population and per
capita income, the need for electricity will ever be on the rise. The industry is in a growth stage
with the Government of Bangladesh taking pragmatic steps to make the whole country under
electricity coverage by 2021. The company has also gone through strategic restructuring even
though they have only two principal revenue generating component.

The stock market of Bangladesh has been acting weird lately (not recently to be honest). Hence,
even though the company is in a good stage, the market return might state otherwise.

United Power Generation and Distribution Company Limited  

Weighted Average Price Weight Price
Discounted Cash Flow   50% 307.73
Relative Valuation     30% 212.50
Dividend Discount Model   20% 310.49
      Weighted Average Price   279.72

Target Price       279.72

Market Price       265
      Return   5.55%

The final decision is to sell the stock from the portfolio since the return (5.55%) is lower than the
expected return of 11.5% even though it is undervalued.

Page | 6
 Global Economic Analysis
Global Economic Outlook

Global growth after 2019 has been forecast to 2.6 percent reflecting the broad-based weakness
observed during the first half of the year, including a further declaration in investment amid
rising trade tensions. In particular, global trade growth in 2019 had also been revised down a full
percentage point.

Accordingly, global trade, which is intensive in machinery and consumer durables, remains
sluggish. The downgrades to the growth forecast for China and emerging Asia are broadly
consistent with the simulated impact of intensifying trade tensions and associated confidence
effects. But still the emerging and developing Asia is expected to grow at 6.2 percent in 2019-20.

Global Power Sector Outlook

Global power sector investment dipped by 1% to just over USD 775 billion with lower capital
spending on generation. Investment in coal-fired power declined by nearly 3% to its lowest level
since 2004, mainly due to lower spending in China and India. Final investment decisions (FIDs)
for new plants declined to their lowest level this century and retirements were at near record
levels. Nevertheless, the global coal power fleet will continue to grow, due to net additions in
developing Asian countries.

900

800

700

600
USD Billion

500

400

300

200

100

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Renewable Power Electricity Networks Nuclear Fossil Fuel Power

Figure: Global Investment in the Power Sector by Technology (iea.org)

Page | 7
Global Outlook: Bangladesh Perspective

The transformation of our power sector is being driven by the interaction between five global
mega-trends, and is amplified by a set of shifts taking place within the sector. The five mega-
trends include: Demographic and social change; technological breakthroughs; climate change
and resource scarcity; a shift in global economic power; and rapid urbanization.

Global economic dynamics also hold implications for Bangladesh. For example, Chinese state-
owned power and utilities companies have been active in their search for suitable international
power utility and grid investment opportunities. FDI inflow to Bangladesh has been rising, and
the power sector accounts for around 14% of total FDI.

The sector as a whole accounts for more than two-thirds of global greenhouse-gas emissions,
with just over 40% of this stemming from power generation. Resource scarcity and the
associated geopolitics and economics of gas, oil, and coal supply are key factors shaping the
power market policy.

Page | 8
 Macro-economic Analysis
Population Growth

The population of Bangladesh is undoubtedly the principal concern of our macro-economic

situation. The population has been increasing at a rate of 1.45% for the last 30 years (CIA World
Factbook). The growth has declined to the rate of 0.62% for the last 10 years (World Bank). This
ever increasing population growth is the topmost priority in terms of power sector investment as
the Government of Bangladesh has set a target to bring the whole country under electricity
coverage by 2021.

165,000,000

160,000,000

155,000,000

150,000,000

145,000,000

140,000,000

135,000,000
2008 2010 2012 2014 2016 2018 2020 2022

Per Capita Income Growth

At present, the per capita income of Bangladesh stands at $1909 (BBS). It has seen a growth of
9% in the per capita income from $1751 (2018). The growth rate has been more than 10% for the
last 10 years (BBS). Higher per capita income will lead to people spending more or electronics
and infrastructure as the household consumption per capita of Bangladesh is also among the
highest in the South East Asian Region ($834 | 2019).

$2,500.00

$2,000.00

$1,500.00

$1,000.00

$500.00

$-
2008 2010 2012 2014 2016 2018 2020

Page | 9
Money Supply and Inflation

The inflation rate of Bangladesh for the year is 6.3%. Historical data shows that Bangladesh has
been facing inflation of more than 5% for more than 30 years or so (CIA World Factbook). This
means that the money supply has also been increasing for greater investment in both private and
public sector of the country.

M1
25,000,000,000

20,000,000,000

15,000,000,000

10,000,000,000

5,000,000,000

-
2008 2010 2012 2014 2016 2018 2020 2022

Overall Investment Growth

Public and private sector combined rose to 31.56 percent of GDP in the year 2018-19 which was
30.17 percent last year (BBS). Government is working the overall development of investment
environment in order to increase domestic and foreign investment ahead of the ‘Mujib’ Year.

GDP % of Overall Investment

40
35.14
35 31.56
30 28.77 29.32 30.17
24.47
25
19.65 19.82 19.91 20.42 20.28
20
15
10
5
0
2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016- 2017- 2018- 2019-
10 11 12 13 14 15 16 17 18 19 20

Page | 10
 Industry Analysis
Bangladesh Power Industry at a Glance

Unit 2009 2019

No. of Power Plants 27 134
Grid Capacity MW 4,942 22,051
Highest Generation MW 3,268 12,893
Power Import MW - 1,160
Total Consumers Million 10.8 34.3
Transmission Line Circuit KM 8,000 11,650
Distribution Line KM 260,000 532,000
Grid Substation Capacity MVA 15,870 41,195
Access to Electricity % 47% 94%
Per Capita Generation KWh 220 510
ADP Allocation BDT Billion 26.8 267.7
System Loss % 16.90% 9.35%

Industry Life Cycle

Bangladesh’s power sector is one of the fastest growing in South Asia. The growth in terms of
capacity addition has been remarkable -- increasing from 5% to 28% from 2012 to 2018
according to the World Bank and the Bangladesh Power Development Board.

Page | 11
Five Forces Analysis

Threat of New Entrants (Moderate)

 Low switching cost to the competitors for the end-users

 Undifferentiated product i.e. electricity so users have the incentives to switch to low cost
suppliers
 High fixed cost acts as a barrier to entry
 Moderately high market growth leading to better opportunities for new entrants

Threat of Substitutes (Weak)

 High switching cost to substitutes like solar panel, nuclear etc.

Buyer Power (Moderate)

 Small to gigantic buyers

 Low oligopoly threat
 Buyer tendency to switch to the supplier who is efficient and cost effective

Supplier Power (High)

 Very large suppliers’ size

 Very high switching cost from electricity to other substitutes

Competitive Rivalry (Moderate)

 Low number of competitors

 Hard to exit

Growths and Trends

Public sector accounts for highest power generation of the country while the contribution from
private sector is also on the rise driven by the government policy toward increasing power
generation at the earliest by encouraging more private investment in this sector. Out of the total
20,430 MW power generation capacity of the country, public sectors capacity stands at 8,986
MW, private sector capacity stands at 8,354 MW (including 1,160 MW power import).

Electricity consumption has increased in line with the rise in capacity. Domestic and industrial
sectors are the key power demand drivers in the country. The industrial sector has witnessed
impressive growth in the last six to seven years. Key industries driving growth in the country are
RMG manufacturing, infrastructure development, and pharmaceutical. Bangladesh and other
LDCs are exempted from patent protection by WTO for an extended period until 2033 (from
original 2016). Bangladesh is allowed to produce any patented medicines without taking prior
permission from innovator. Hence, further scope for growth is still wide open.

Page | 12
We can expect electric power consumption per capita in Bangladesh to increase significantly as
demand is expected to increase in line with GDP growth and the government’s master plan to
generate 24,000MW of electricity by 2021, 40,000 MW by 2030, and 60,000 MW by 2041.
Bangladesh has continuously added power capacity at an impressive growth rate in the last five
years.

Facilitating Renewable Energy Development

Given our depleting reserves, diversifying our energy sources is of utmost importance.
Facilitating renewable energy development will require the involvement of the government, the
utilities, and the industry. The government will need to set targets for renewable energy
deployment consistent with the national energy strategies.

Technology and Efficiency

Information technology (IT) solutions are key enablers for improving the efficiency of the power
sector. Considering the requirements of Bangladesh, we foresee that information and operational
technologies shall play a critical role in Bangladesh’s power sector.

Capacity-building of the Workforce

To harness technological advances, capacity-building is important. This is especially the case

with frequent disruptive technologies in industries -- including utilities which create demand for
wider skill sets.

Role of Policy-makers

Our policy-makers have demonstrated initiatives to keep pace with the rising energy supply gap.
The government has set up a designated department -- the power cell -- to facilitate private sector
investment in the power industry in Bangladesh.

Page | 13
 Company Analysis
United Power Generation & Distribution Company Ltd. (UPGDCL) was incorporated on January
2007 and started its commercial operation on December 2008. The principal activity of the
Company is to generate and distribute electricity at the Dhaka Export Processing Zone (DEPZ)
and Chittagong Export Processing Zone (CEPZ).

The company was listed both in Dhaka Stock Exchange and Chittagong Stock Exchange in
March, 2015. Currently, the Company operates with two power plants at DEPZ and CEPZ with
electricity generation capacity of 86 MW and 72 MW respectively.

SWOT Analysis

Strengths:

 Only true commercially independent power generation and distribution company in the
Export Processing Zones.
 Underwent strategic restructuring and ultimately was transformed into the holding
company for all the gas based power operation of the United Group.
 Total generation capacity of UPGDCL combined stands at 486 MW with two power
plants at DEPZ and CEPZ with electricity generation capacity of 86 MW and 72 MW
respectively.

Weaknesses:

 Shortage of raw material (natural gas) supply arrangement

 Scope of inefficiency for operational and maintenance (O&M) arrangement
 Risk of unpredictable severe natural calamities

Opportunities:

 Increased incentives by the Government of Bangladesh in the sector to bring the whole
country under electricity coverage by 2021
 Different development projects under PPP model are being implemented

Threats:

 Compliance and regulatory risks

 Climate policy
 Increased risk of environmental hazard
 Increased investment in renewable and nuclear energy

Page | 14
Porter’s Generic Strategies

UPGDCL is not only involved in power generation but also power distribution, steam generation
and supply right up to their customers’ doorstep. It was established out of the necessity for
uninterrupted, quality power supply mainly to the industries housed within the Export Processing
Zones (EPZs) of Bangladesh. This are why their competitive advantage is differentiation
focused.

BCG Matrix

UPGDCL is one of the electricity generators and distributors inside the BEPZ and CEPZ. The
company also distributes electricity to Rural Electrification Board (REB), Bangladesh Power
Development Board (BPDB), Karnaphuli Export Processing Zone (KEPZ) and other private
companies. Hence, the company has a relatively large market share compared to its competitors
both inside and outside the EPZs. And with the increasing industry growth, demand and supply
of electricity & Steam are also increasing. So, the company is in a star position.

Page | 15
Ansoff Matrix

UPGDCL is currently supplying only two components: Electricity and Steam. And they are not
going for any other new market development for the foreseeable future. Hence, they are in the
existing market with their existing products being market penetrators.

Investment Positives

 As per the annual report, UPGDCL is set to increase its capacity in both DEPZ and CEPZ
to 100 MW each to cope up with the increased load growth.

 The company was able to repay its long term loan of BDT 1.4 billion and redeemed
cumulative preference shares of BDT 1.2 billion before consolidation in June 30, 2018.

 Emerging Credit Rating Limited (ECRL) has assigned the initial rating of the company as
‘AAA’ in the long term

 The company has power purchasing agreements with Bangladesh Export Processing
Zones Authority (BEPZA) for 30 years with a provision of further extension for another
30 years.

 The company has been enjoying tax exemption for 15 years starting from its operation.

Investment Negative

 The power plants of the company are run by natural gas. Hence, the recent hike and gas
price and scarcity of natural gas depletion within 15 to 20 years will adversely affect the
operation and profitability of the company.

Page | 16
 Company Valuation
Assumptions and Notes

Risk free rate (Bangladesh Bank 5 Year Treasury Bond) 8.44%

Expected rate of return 11.50%
Perpetual growth rate 2.12%
Projected growth rate to continue after consolidation at the consistent rate
   
Note:
UPGDCL has received exemption from all taxes from the GoB for 15 years of commencement

The perpetual growth rate is assumed to be 2.12% adjusting the population growth rate of 0.42%
for the last 10 years (World Bank).

Since the market return calculated from the broad index is very low (3%), even compared to the
risk free rate of government treasury bonds, expected market return is set at 11.50%.

UPGDCL acquired United Energy Limited on 1 July, 2018 and accordingly the Board of
Directors decided to make consolidated financial statements from that date.

Calculations

Revenue

Revenue growth is projected to be 12.79% considering the company’s recent consolidation. This
is the average of the last 4 years’ average positive growth of revenue. Even though their revenue
growth declined in the FY2019, they had a 26% growth of electricity supply and a 475% growth
of steam supply in the previous 3 years. An addition of power plants to increase capacity in two
EPZs to 100 MW each will likely increase their revenue in the future.

Cost of Sales

34.58% is the projected proportion of cost of sales to revenue in the forecasted period. This is
calculated by finding the historical average proportion of cost of sales to revenue using both the
consolidated financial statements and the previous ones.

Page | 17
Other Operating Income

Other operating income is forecast to decline by 9.41% each year constantly since they disposed
of their previous subsidiary.

General and Administrative Expenses

G&AE is projected to be an average of 1.18% in proportion to revenue for the forecast period.

Finance Income

The interest income is from receivables from related party and short term cash deposits. The
average interest income from the historical income statements is 6.81%.

Finance Cost

After consolidation the company took both long term and short term borrowings for which they
have to pay an average interest of 5.58%.

Income Tax Expenses

UPGDCL enjoys tax exemption from the Government of Bangladesh for 15 years since its initial
operation but still the company maintains an average provision of 0.52% of income tax and this
is to continue for the forecasted period.

Page | 18
Depreciation and Non-current Assets

The company has been selling off their PPE for the last 4 years and this continued in the last
consolidated year. The average deprecation rate is 5.19% which is to continue and their PPE is to
be kept selling off at an average rate of 3.56% for the forecast period.

Prepaid lease rent is seen to be paid at an annual amount of BDT 20,272,000 for the last three
years which is to continue at the same payment.

Current Assets

Inventories is projected in proportion to cost of sales at an average of 25.94% and the other
current assets are all projected in proportion to revenue.

Trade and other receivables at an average of 22.21%, Advances and deposits at 1.45%,
investment in marketable securities at 1.92%, receivables from related party at 75.36% and lastly
cash and cash equivalents at 19.77% all in proportion to revenue.

Page | 19
Non-current and Current Liabilities

Borrowings under non-current liabilities is decreasing at an average rate of 10.60%.

And they have been taking short term borrowing at an increasing average rate of 2.23%. Both the
short term and the long term borrowings were taken after consolidation. They also restated
amounts of the both in previous financial statements. Before that they repaid all their loans in
FY2015.

Trade and other payables, accrued expenses and payable to related parties are projected at
average rates of 5.79%, 0.93% and 45.69% respectively in proportion to cost of sales.

See Appendix for Pro Forma Income Statement and Pro Forma Balance Sheet

Page | 20
Beta and WACC Estimation
7,000.00 400

6,000.00 350

300
5,000.00
250
4,000.00
200
3,000.00
150
2,000.00
100
1,000.00 50

0.00 0
20 19 19 19 19 19 19 18 18 18 18 18 18 17 17 17 17 17 17 16 16 16 16 16 16 15 15 15 15
n- v- p- l- y- r- n- v- p- l- y- r- n- v- p- l- y- r- n- v- p- l- y- r- n- v- p- l- y-
Ja No Se Ju Ma Ma Ja No Se Ju Ma Ma Ja No Se Ju Ma Ma Ja No Se Ju Ma Ma Ja No Se Ju Ma

DSEX UPGDCL
Figure: Movement of DSE Broad Index and UPGDCL

Beta estimation was done by taking 58 months’ market return and UPGDCL return in the Dhaka
Stock Exchange to be 0.56. Yearly market return was found to be 3%.

Covariance   0.00090358
Variance of Market Return 0.001620013
Beta     0.557760727
Market Return   0.002573362
Yearly Market Return 0.030880347

Weighted Average Cost of Capital was found to be 9.89%

Risk-free rate   8.44%

Expected Market return 11.50%
Beta     0.557760727
Cost of equity   10.1467%
Cost of debt   5.5819%
After tax cost of debt 5.5530%
       
139,653,860,76
Total market value of equity 5
Book value of debt   8,132,228,048
Weight of equity   0.94497298
Weight of debt   0.05502702
   

Page | 21
 WACC     9.8940%
Change in Working Capital

Net working capital in the first projected year is found to be negative because of declining
growth and higher cost of sales in the previous year. As a result, the average proportion resulted
in a lower working capital in FY2020 compared to the previous FY.

Discounted Cash Flow Valuation

The share price under discounted cash flow valuation was found to be BDT 307.73 indicating the
shares to be undervalued in the stock exchange.

Page | 22
Dividend Discount Model Valuation

Sustainable Growth Calculation

26.11
Return on Equity   %
31.26
Retention Ratio   %
   
Sustainable Growth Rate 8.16%
   
10.15
Cost of Equity   %

Projected return on equity was used for the calculation of sustainable growth rate to be 8.16%
used for dividend discount model valuation.

Zero Growth Model

Constant Growth Model

Page | 23
Weighted Average

          Weight Price
371.323
80%
Dividend Discount Model - Constant Growth 4
67.1684
20%
Dividend Discount Model - Zero Growth   5
        Weighted Average Price   310.49

Two types of dividend discount model were used. Assigning 80% weight to constant growth
model and 20% weight to zero growth model, weighted average price under dividend discount
model was found to be BDT 310.49 indicating yet another undervalued stock.

Relative Valuation

P/E Ratio Valuation

P/B Ratio Valuation

Page | 24
P/S Ratio Valuation

Weighted Average

          Weight Price
Relative Valuation - P/E Ratio     50% 258.57
Relative Valuation - P/B Ratio     30% 202.80
Relative Valuation - P/S Ratio     20% 111.90
        Weighted Average Price   212.50

Under the three relative valuations, the weighted average price of the UPGDCL stock resulted in
BDT 212.50 indicating the stock to be overvalued.

Page | 25
Final Decision

United Power Generation and Distribution Company Limited  

Weighted Average Price Weight Price
Discounted Cash Flow   50% 307.73
Relative Valuation     30% 212.50
Dividend Discount Model   20% 310.49
      Weighted Average Price   279.72

Target Price       279.72

Market Price       265
      Return   5.55%

The final weighted average price of UPGDCL using all the three valuation models came to be
BDT 279.72 indicating the stock to be undervalued. But the stock return is 5.55% which is lower
than the expected rate of return of 11.5%.

So, the decision is to sell the stock from the portfolio.

Page | 26
 Appendix
Pro Forma Income Statement

Pro Forma Balance Sheet

Total Assets

Page | 27
Total Equity and Liabilities

Page | 28