Introduction

This term paper is prepared with an intention to meet the partial requirement of the course Securities Analysis and Portfolio Management (FIN 423). We have chosen Square Textiles, ASKML & HR Textiles Ltd. for this purpose. The have figured out the intrinsic value of these organizations through constant growth model and matched it with the market price of its shares. Later on, we discussed and internally compared the reasons for which the market price of these organizations shares are higher than our calculated intrinsic value. Objective of the Study: The objective of this term paper is to get familiarize with the real market situation and compare it with the theoretical concepts. The main objective of this term paper is to evaluate the valuation of the stocks of Square Textiles, ASKML and HR Textiles Ltd. In addition, the term paper seeks to achieve the following objectives: 1. To find out the intrinsic value of the shares of the organizations. 2. To compare the intrinsic value with the market price of the shares of the organizations. 3. To find out the reasons behind higher market price in comparison to the intrinsic value.

Methodology of the Study:

Mostly we have collected data from secondary sources to conduct the analysis of this term paper. Some of the secondary sources that we have used is give below: 1. Annual Report of Square Textiles for the year 2009 and 2012. 2. Annual Report of ASKML for the year 2009, 2012 and 2013. 3. Annual Report of HR Textiles for the year 2009 and 2012. 4. Different articles and journals. 5. Different websites which includes the Dhaka Stock Exchange (DSE) and Stock Bangladesh website.

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Scope of the Study: 1. We were able to know the market price of the shares of Square Textiles, ASKML and HR Textiles Ltd. 2. We were able to know the amount of dividends that Square Textiles, ASKML and HR Textiles Ltd. share with their stockholders. 3. We were able to know how to evaluate the intrinsic value in real life of large companies like Square Textiles, ASKML and HR Textiles Ltd. 4. We were able to know the reasons behind the higher market price Square Textiles, ASKML and HR Textiles Ltd. in comparison to our calculated intrinsic value. 5. We were able to know different rules and regulations of Dhaka Stock Exchange. Limitations of the Study: 1. The insufficiency of information is the main constraint of the study. 2. Inexperience and time limitations created some obstacles. 3. Regular class schedule, assignments and examinations of other courses created some problems.

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Background of the Companies

Square Textiles Ltd: Square Textiles Ltd was established as a public limited company in 1994 as a group company in Square group with a business line of manufacturing and marketing of yarn. The company started its operation on 1997 and was listed at both Dhaka Stock Exchange and in Chittagong Stock Exchange in 2004. At the end of 2009, paid-up capital of the company was TK.705.84 million with 70,584,053 shares outstanding. The company is very profitable and doing very good in terms of share price also. Dividend payout in both cash and bonus share has also been very consistent through the last few years. Square Textiles Ltd got Oeko-Tex standard 100 and ISO-9002 certification in 2000. At the end of 2009, the production capacity of the company stands at 11,582,899 Kg Ring yarn and 12,329,688 Kg of O/E yarn. Apex Spinning & Knitting Mills Ltd. (ASKML): APEX Spinning and Knitting Mills Ltd. (ASKML) was incorporated in 1990 as a public limited company and listed in Dhaka Stock Exchange and in Chittagong Stock Exchange. The company was initially formed for processing and export of knit garments but now ASKML is a leading manufacturer and exporter of all kinds of textiles knitting garments. ASKML is 100% export oriented, vertically integrated knitting, dyeing, finishing and garment manufacturing company with production capacity of about 15 million pieces of garments per year. ASKML exports to North America, EU countries and to South East Asia. ASKML has a desirable reputation as an international garment manufacturer based on a simple but unwavering philosophy of producing high quality products. All fabrics produced in ASKML's own factory are tested in its own laboratory for wet & dry-rub fastness, wash fastness, dimensional stability, required fabric density, yarn count and composition before making finished garments. ASKML has permission to put OKO Tex label on all its garments and currently in the middle of attaining ISO 9001:2000 certification from the accreditation body of UKAS.

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HR Textiles Ltd.: Pride Group is among the large Bangladesh private sector manufacturing based enterprises, and H.R. Textile is one of the sister concern of Pride group. H.R. Textile Mills Limited is a vertical public limited company, engaged in manufacturing of knitwear products. H.R. Textile Mills Limited is a Lycra assured factory. It is one of the pioneering composite knitwear factories in Bangladesh. It has a complete North American and European state-of-the-art setup, thoroughly engineered and is capable of manufacturing a whole range of knit fabrics and garments. The group started modestly in 1960 as Dacca Textile Ltd and with prudent entrepreneurship of its Founder Chairman Alhaz Md. Halimur Rahman. He started Dacca Textile Ltd as a several types of semi-mechanized industry that means larger types of cottage industry. That time their activities were only printing Sarees. In 1986, they started their journey with dyeing and design Sarees for local market. In 1990, they bought knitting machine. Today H.R. Textile is a renowned vertical textile setup engaged in the manufacture of knitwear products with a goal to export to the European Union, the USA and Canada. The organization is also engaged in production and marketing of sarees, kids wear, ladies wear, home furnishing and other textiles products through a chain retail outlets spread all over Bangladesh. It has a total employee of around 5000 people. Name of the current chairman of H.R. Textiles is Dr. Muhammad Abdul Moyeen.

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Valuation & Analysis of the Shares of the Companies

In this part, we have calculated the intrinsic value of Square Textiles, ASKML and HR Textiles Ltd. Afterwards, we have calculated the market price by averaging the market price of these companies for last 1 year. Lastly, we discussed about the possible reasons behind the higher market price of these companies in comparison to our calculated intrinsic value. We have also compared some of the reasons with our selected companies as assessment between companies of same industry is more viable and to make our report more authentic. Constant Values: Market Return (Rm) Formula P0 P1 Calculation Value

Rm = {(P1/P0) -1}
Note:

4058.65986

4684.07065

Rm = {(4684.07065/4058.65986) -1}

Rm = 15.41%

P0 = Stock Index of 24th February, 2013 P1 = Stock Index of 17th February, 2014 Risk Free Rate (Rf) 5%

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Square Textiles Ltd. 1. Intrinsic Value of the Share: Growth Rate (g) Formula FV = PV (1+i)5 PV (2009 Dividend) TK1.60 FV (2013 Dividend) TK1.85 Calculation 1.85 = 1.60(1+i)5 Value i = 3%

Required Rate of Return (Ke) Formula Ke = Rf + (Rm-Rf) * Rf 5% Rm 15.41% 1.09 Calculation Ke = 0.05 + (0.1541 0.05) * 1.09 Value Ke = 16.35%

Intrinsic Value (V) Formula V = [{D0(1+g)}/(Ke-g)] D0 (2013 Dividend) TK 1.85 g Ke Calculation Value
V = TK 14.29

3% 16.35% V = [{1.85 (1+0.03)}/(0.1635 0.03)]

2. Market Price of the Share:

Average Market Price for Last 1 Year

Formula
P = {(Highest Price + Lowest Price) / 2}

Highest Value TK 119.30

Lowest Value TK 86.20

Calculation
P = {(119.30 + 86.20)/2}

Value P = TK 102.75

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Comparison between Intrinsic Value and Average Market Price:

SQUARE TEXTILES LTD.

102.75

14.29

Market Value Intrinsic Value

Square Textiles 102.75

14.29

From this graph we can see that there is a significant difference between the intrinsic value and the average market price of Square Textiles Ltd. We can see that the market price of the share is TK 102.75 per share which is very much higher than our calculated intrinsic value which is TK 14.29 per share.

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Reasons behind Higher Market Price of Square Textiles: 1. Paid-up Capital: Usually investors wants to invest in such a company which mostly depends on their shareholders for any sort of financing rather than debt financing. Square Textiles do depend largely on equity financing as a large portion of their capital has been invested by their shareholders.

PAID-UP CAPITAL
1,344

Million

84

253

Square Textile ASKML HR Textile

Paid-up capital 1,344 84 253

In this graph we can see that, Square Textiles generated a high amount of capital (1344 Million) from there shareholders in comparison to ASKML (84 Million) and HR Textiles (253 Million), which attracts the investors towards this share and as a result the share price is higher in the market.

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2. Foreign Investors: Foreign investors for a particular organization can be crucial as they bring different types of innovative ideas, technology and management policies from abroad to the local company. In case of Square Textiles, significant percentage of their shareholders are foreign investors which is shown in the graph below:

PERCENTAGE OF FOREIGN INVESTORS

6.39%

0.29%

0%

Square Textile

Foreign Investors 6.39% 0.29%

ASKML
HR Textile

0%

In this graph we can clearly see that Square Textiles has large percentage of investors from foreign countries which makes them superior from other companies in textile industry. As a result, it works as a key tool for investors to invest on the shares of Square Textiles which is gradually increasing the price of the share.

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3. Number of Trades: As Square Textiles is one of the renowned company in Bangladesh, significant number of investors invests in the shares of this company, which increases the number of trade in the market and also the price of the share.

NUMBER OF TRADE
716

59

98

Square Textile ASKML HR Textile

Number of Trade 716

59
98

The graph clearly shows that the number of trade of Square Textiles is significantly higher than the rest of the two companies which shows a clear preference of investors to invest in Square Textiles shares because of the higher liquidity. 4. Public Confidence: Investors do have confidence on the shares of Square Textiles as it is one of the largest and renowned textile companies in Bangladesh and the past record is pretty good so far. Moreover, the Square Group was founded by Samson H Chowdhury who was one of the most respected persons in Bangladesh which also adds some value to the shares of the company. So, investors do not hesitate to invest in the shares of Square Textiles, which overvalues the price of the shares.

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Apex Spinning & Knitting Mills Ltd. 1. Intrinsic Value of the Share: Growth Rate (g) Formula FV = PV (1+i)5 PV (2009 Dividend) TK1.50 FV (2013 Dividend) TK1.88 Calculation 1.88 = 1.50(1+i)5 Value i = 5%

Required Rate of Return (Ke) Formula Ke = Rf + (Rm-Rf) * Rf 5% Rm 15.41% 0.77 Calculation Ke = 0.05 + (0.1541 0.05) * 0.77 Value Ke = 13.02%

Intrinsic Value (V) Formula V = [{D0(1+g)}/(Ke-g)] D0 (2013 Dividend) TK 1.88 g Ke Calculation Value
V = TK 24.61

5% 13.02% V = [{1.88 (1+0.05)}/(0.1302 0.05)]

2. Market Price of the Share:

Average Market Price for Last 1 Year

Formula
P = {(Highest Price + Lowest Price) / 2}

Highest Value TK 108.40

Lowest Value TK 55.60

Calculation
P = {(108.40 + 55.60)/2}

Value P = TK 82.00

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Comparison between Intrinsic Value and Average Market Price:

APEX SPINNING & KNITTING MILLS LTD.

82

24.61

Market Value Intrinsic Value

ASKML

82
24.61

From this graph we can see that there is a significant difference between the intrinsic value and the average market price of ASKML. We can see that the market price of the share is TK 82.00 per share which is very much higher than our calculated intrinsic value which is TK 24.61 per share.

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Reasons behind Higher Market Price of ASKML: 1. High Payout Ratio: As ASKML is a 100% export oriented organization, they are producing the products at a lower cost in Bangladesh and selling at a comparatively higher price in the foreign markets, which generates a large amount revenue. So, they are investing a large amount of capital in the stock market and also earning in a large portion in comparison to other organizations in textile sector. As a result, they are giving away a large percentage of their earnings to their shareholders which influence existing and other investors to invest more in the shares of ASKML, which raises the price of the shares.

PAYOUT RATIO
89.552%

65.217%
36.217%

Square Textile

Payout Ratio 89.552% 36.217%

ASKML
HR Textile

65.217%

In this graph, we can see that ASKML is giving the highest percentage of earnings to their shareholders in comparison to the rest of the companies. Many of the investors might not take this higher payout ratio positively as they are not keeping a large portion of earnings for their expansion. The reality is, ASKML is one of the largest textile organizations in Bangladesh and have very few necessity of expanding further. Still for safety reasons, they are retaining a small portion of earnings and distributing the larger part to the shareholders.

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2. Less Risky: Even though ASKMLs payout ratio is high, it is also less volatile as the beta () is less than the standard beta of 1, which means, the security is less volatile than the market. Because of that, conservative investors keep the ASKML shares in their priority list as it is less risky and also giving them a higher return compared to the rest of the companies of this industry. As a result, investors are purchasing the shares of ASKML which increases the price of the shares.

BETA
1.09 1.34

0.77

Square Textile ASKML

Beta 1.09 0.77 1.34

HR Textile

From the graph we can see that in comparison to the rest of the two companies, the ASKML contains lower beta ().

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HR Textiles Ltd. 1. Intrinsic Value of the Share:

Growth Rate (g)

Formula FV = PV (1+i)5 PV (2009 Dividend) TK1.00 FV (2013 Dividend) TK1.66 Calculation 1.66 = 1.00(1+i)5 Value i = 11%

Required Rate of Return (Ke) Formula Ke = Rf + (Rm-Rf) * Rf 5% Rm 15.41% 1.34 Calculation Ke = 0.05 + (0.1541 0.05) * 1.34 Value Ke = 18.95%

Intrinsic Value (V) Formula V = [{D0(1+g)}/(Ke-g)] D0 (2013 Dividend) TK 1.66 g Ke Calculation

V = [{1.66 (1+0.11)}/(0.1895 0.11)]

Value
V = TK 23.18

11% 18.95%

2. Market Price of the Share: Average Market Price for Last 1 Year Formula
P = {(Highest Price + Lowest Price) / 2}

Highest Value TK 47.80

Lowest Value TK 19.10

Calculation
P = {(47.80 + 19.10)/2}

Value P = TK 33.45

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Comparison between Intrinsic Value and Average Market Price:

HR TEXTILES LTD.
33.45 23.18

Market Value

HR Textiles Ltd. 33.45 23.18

Intrinsic Value

From this graph we can see that there is a significant difference between the intrinsic value and the average market price of HR Textiles. We can see that the market price of the share is TK 33.45 per share which is a bit higher than our calculated intrinsic value which is TK 23.18 per share.

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Reasons behind Higher Market Price of HR Textiles: 1. Large Percentage of Public Shares: As HR Textiles is distributing a large percentage of shares as a common stock, the price of the shares is staying within the range of the investors as the market price of the shares is pretty close to the intrinsic value. Moreover, as the share price is moderate, investors do want to invest in the share to have a higher return in the future, which gradually increases the price of the share.

PERCENTAGE OF PUBLIC SHARES

36.88%
18.64% 19.88%

Square Textile
ASKML HR Textile

Percentage of Public Shares 18.64%

19.88%
36.88%

The graph shows that HR Textiles distributes the largest percentage (36.88%) of shares to the public in comparison to Square Textiles (19.88%) and ASKML (18.64%). 2. Moderate Retention Ratio: Maybe not the highest but HR Textiles do have a decent amount of retention ratio (34.783%). It signifies that company may have further expansion plan in mind. So, it may attract the investors to invest in the shares of this company as further expansion of the company will lead to even higher price of shares of the company.

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Recommendations
Even though the condition of the shares of Square Textiles, ASKML and HR Textiles is pretty good, still we have suggested some factors which investors should analyze before investing: Square Textiles Ltd.: Higher Pay Out for Shareholders: Payout ratio is significantly less for Square Textiles Ltd. even though they are not in the growth phase nor they have any significant expansion plan in the future. So, income oriented investors should think twice before investing into the shares of Square Textiles as the dividend is not that much higher and also there is less chance of capital gain. Apex Spinning & Knitting Mills Ltd (ASKML): Analyze the P/E Ratio Carefully: Even though the shares of ASKML is giving a good return to the investors with less risk, its P/E ratio is too high (50.56) in comparison to normal standard (10-17). At the first look, investors might think that it is good as it has high expected future growth in earnings but it might also be the case that the earnings is exceptionally low or the stock may be subject to speculative bubble. So, investors should not only look at the value of the P/E ratio but also the factors through which it is calculated. HR Textiles Ltd.: Involvement of Foreign Investors: Even though HR Textiles Ltd. has a goal to export their products in foreign countries, all of their investors are local people and do not have any foreign investors. As a result, they might lack innovation as they have less variation of ideas. So, the shares of HR Textiles Ltd. is not appropriate for investors who wants to invest in the share of an innovative company.

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Conclusion
Square Textiles, ASKML and HR Textiles Ltd. are three of the leading textile companies in Bangladesh and has a significant influence in the stock market. We have calculated the intrinsic value of the shares of these companies and compared with their average market price. We came up with a solution that the market price of these stocks are overvalued in comparison to their intrinsic value because of some specific legal reasons. Though the market condition of the stocks of these companies are pretty good, still it can be improved if the management of the companies takes some significant measures.

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References
(2009). Annual Report. Dhaka: Sqaure Textiles Ltd. (2009). Annual Report. Dhaka: Apex Spinning & Knitting Mills Ltd. (2009). Annual Report. Dhaka: HR Textiles Ltd. (2012). Annual Report. Dhaka: Square Textiles Ltd. (2012). Annual Report. Dhaka: Apex Spinning & Knitting Mills Ltd. (2012). Annual Report. Dhaka: HR Textiles Ltd. (2013). Annual Report. Dhaka: Apex Spinning & Knitting Mills Ltd. Apex Group. (2014). Retrieved from Apex Spinning and Knitting Mills Ltd.: http://www.apexknitting.com/ Dhaka Stock Exchange. (2014, February 17). Retrieved from http://www.dsebd.org/ Square Group. (2014). Retrieved from Square Textiles Ltd.: http://textile.squaregroup.com/sqtextile.html Stock Bangladesh. (2014, March 30). Retrieved from http://www.stockbangladesh.com/resources/coefficient Stock Bangladesh. (2014, April 4). Retrieved from http://www.stockbangladesh.com/symbols/details2/17421/0 Stock Bangladesh. (2014, April 4). Retrieved from http://www.stockbangladesh.com/symbols/details2/17446 Stock Bangladesh. (2014, March 4). Retrieved from http://www.stockbangladesh.com/symbols/details2/17442/0 Nahian. (2012, August 15). Educarnival Pedia. Retrieved from http://edupedia.educarnival.com/human-resource-management-practices-in-h-rtextile-of-bangladesh/

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