Stock Valuation ofGLAXOSMITHKLINE Bangladesh
Limitedusing Discounted Cash Flow
Techniques
“Team membersNafisa Akkas (B1304106 )
Sabiha Zaman Khan (B1304113 )Neha Agarwal (B1304117 )(Bangladesh University of professionals)
(BUP-BBA 4)
IntroductionValuation methods typically fall into two main categories: absolute and relative valuation models.
Absolute valuation models attempt to find the intrinsic or "true" value of an investment based only on fundamentals.
Relative valuation models operate by comparing the company to other similar companies
ObjectivesBroad Objectives:
To analyze the stock valuation of GlaxoSmithKline Bangladesh Ltd. by using different approaches of discounted cash flow technique.
Specific Objectives:
To learn the application of the procedures of stock valuation in order to make decisions for investment for any stock.
To understand the stock valuation properly. To calculate the intrinsic value and compare it with the market. To predict the future growth and return on equity for future analysis of the
stock.
Methodology
DDM (Dividend Discount Model)
FCFE (Free Cash
Flow To Equity)
FCFF(Free Cash
Flow To Firm)
Sources of data
Website of the GlaxoSmithKline Bangladesh Ltd.
Different procedure manual published by GlaxoSmithKline Bangladesh Ltd.
Annual reports of GlaxoSmithKline Bangladesh Ltd.
Limitations Some of the information from secondary sources were not arranged consistently and the data were fluctuating.
In some cases information provided in websites does not match with the information provided in annual reports
The available information is up-to 2015. So all things we have forecasted for the beginning of the year 2016.
As we are doing the stock valuation first time so there might be some misunderstanding or mistakes done by us.
About the company
GlaxoSmithKline (GSK) is one of the leading multinational companies in the world and the sector it covers is mainly the pharmaceutical industry, besides this it also concentrates on consumer health care products. GSK supplies products to 140 global markets and has over 100,000 employees worldwide. GSK has 180 manufacturing site in 41 countries.
2011 2012 2013 2014 2015
1,422,250 1,485,560
1,851,112
2,253,985
2,603,804
Share holder's Fund
Key performance indicators of gsk Bangladesh limited:
Earnings per share (EPS) Taka
2011 2012 2013 2014 2015
23.41 20.25
45.35
68.63 68.99EPS per share
Shareholder’s Fund-taka in 000
Return on Shareholder’s Equity
2011 2012 2013 2014 2015
19.8316.42
29.91
36.68
31.92
Return on shareholder's Equity
Net Asset per share –taka
2011 2012 2013 2014 2015
118 123
154
187
216
0
Net Asset per share
OpportunityPossible partnerships & mergers with the pharmaceutical company would increase its capability
ThreatPrice War of competitor.A new competitor have superior access to channel of distribution
SWOTAnalysis
PoliticalGrowing political focus and pressure on
health carePossible changes in international trade regulation and competitive regulation
EconomicalEconomic growth and increase in individual disposable incomeIncrease in average growth rate of Bangladesh Pharmaceutical Market from 8% to 11% in 2014
SocialChanges in customer life styleShift in consumer attitude and
opinionConsumers are becoming
more health conscious
EcologicalImpact to the environment
of GSK activitiesReaction of stakeholders
to this impact
PESTEL Analysis of GlaxoSmithKline Bangladesh
Data AnalysisValuation of stocks using dividend discount
model
◉Formula for valution of DDM:
Calculations
PV up-to 5 years:Dividend growth rate upto 5 years =GM of (RR*ROE) = 0.077Cost of equity Ke = (55/1773) + 0.0647 = 0.0957PV = D1 = = Tk. 261.24
Calculations
PV after 5 years to infinity:Growth rate after 5 years = 0.05PV(5) = =
=
=1830.28 PVo= Total value = Tk (261.54 + 1057.71) = Tk.1318.95
Valuation of stocks using dividend discount mode
Interpretation of DDM The intrinsic value per share we calculated is Tk.1318.95. But the present market price per share is Tk. 1773 So from this valuation model, we can say that the share is
overvalued.
Major assumption in DDM:
At future the dividend for the shareholder will grow at a constant rate, and the rate is 5%.
Valuation of stocks using Free Cash Flow to Equity (FCFE) model
Formula for Free Cash Flow to Equity (FCFE) = Net IncomeLess: Capital Expenditures Add: Depreciation Less:(Change in Non-cash Working Capital) Add: (New Debt Issued - Debt Repayments)
Assumptions for FCFE model
Major assumption: The FCFE of this company will grow at a constant rate after five years and the rate is assumed to be 4%. We have assumed 4% constant growth rate because of the decreasing pattern of the growth rate. Other assumptions: We have assumed that in income statement, most of the components
will be changed based on the volume of sales. We have forecasted the Capital expenditure (CapEx), change in
working capital and change in debt assuming that, they will change in the long term based on the average growth rate of each of them.
Valuation of stocks using Free Cash Flow to Equity (FCFE) model
Valuation of stocks using Free Cash Flow to Equity (FCFE) model
Value per share using FCFE model: Tk. 1587.38 Market price per share: Tk.1773 So according to this approach, At present the share is trading at a price above its intrinsic
value. So from this valuation model, we can say that the share is
overvalued.
Valuation of stocks using Free Cash Flow to Firm (FCFF) model
Formula for FCFFFCFF = EBIT(1-T) Add: depreciation Less: CAPEX Less: Change in working capital
Assumptions for FCFFMajor assumption: The FCFF of this company will grow at a constant rate after five years and the rate is assumed to be 3.364%. We have assumed this constant growth rate based on the arithmetic mean of FCFF growth rate from year 2016 to 2020.Other assumptions: We have assumed that in income statement, most of the components will be
changed based on the volume of sales (percentage of sales method) We have forecasted the Capital expenditure (CapEx), change in working
capital assuming that, they will change in the long term based on the average growth rate of each of them.
We also assumed that for forecasting the depreciation rate will be the average depreciation rate of previous five years.
Valuation of stocks using Free Cash Flow to Firm (FCFF) model
Calculation of WACCCost of debt; Kd = interest paid/ total non-current liabilities = 3308000/48747000 = 0.0678
Debt to Equity ratio : 1.18
Tax rate: 35% = 0.35
WACC =
=0.0239 + 0.0439 = 0.0678
Valuation of stocks using Free Cash Flow to Firm (FCFF) model
Valuation of stocks using Free Cash Flow to Firm (FCFF) model
Value per share using FCFF model: Tk. 1407.69 Market price per share: Tk. 1773 At present the share is trading at a price above its intrinsic
value. So from this valuation model, we can again say that the
share is overvalued.
Summary of the three model of valuation
Valuation Model Intrinsic value per share (Tk)
Current market price per share
(Tk)
Deviation from the current
market price
Comment
DDM 1318.95 1773 454.05 Overvalued
FCFE 1587.38 1773 185.62 Overvalued
FCFF 1407.69 1773 365.31 Overvalued
Findings
The growth of the company is very fluctuating over the years.
The shares are overvalued according to the discounted cash flow technique.
The forecasted trend of free cash flow to equity is increasing from 2016 to 2020 at a decreasing rate.
The forecasted trend of free cash flow to firm is increasing from 2016 to 2019 in a decreasing rate and at year 2020 it declined slightly.
All good companies are not good investments.
Recommendations In the past five years GlaxoSmithKline Bangladesh Ltd had very fluctuating
trend in the sales and profit figures. But with the time, it is declining which might affect the image of the company.
Till 2011,they used to include Worker’s Profit Participation Fund in income statement but after 2011 they didn’t include WPPF in the income statement. This might discourage the employees and overall the performance of the company might fall.
There is an upward trend in debt to equity ratio, again it is pointing out that debts are increasing. Although higher debts can give financial leverage but there is also a risk of meeting up the debt obligations. So, GSK should realize that higher debts can lead it to higher risk.
Recommendations It maintains a vertical organogram whereas now a day’s horizontal
organogram is more used because it is more helpful in the process of communication and passing all the information to the heads. Moreover, it gives everyone chance to take any decisions together.
As the stocks of GlaxoSmithKline Bangladesh Ltd is overvalued so price might fall. That’s why, , it should either increase the dividend or should take initiatives which decrease their share price and bring it on the security market line.
In 2011 the sales growth was much higher than other years, this trend was maintained. Although it’s a very positive indication but GSK should not forget that it can increase the market share more. So, in this regard it should increase the promotional activities to capture the consumer mind more.
ConclusionGlaxoSmithKline is one of the most prominent multinational Pharmaceuticals Company in Bangladesh was established to provides a good and sound health protection medicine to our people.
Because of its firm attitude toward quality, its production cost is increased and hence it is becoming in competitive in the market for some products. It can regain its market share if it can procure raw materials at lower cost.
Discounted Cash Flow Techniques are more famous than Relative Valuation Techniques.
Overall performance of GlaxoSmithKline Bangladesh Ltd is good but its stocks are overvalued by using these three methods which discourages the investors to invest in it.
THANKS!