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.