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!