Empirical research based on Capital Asset Pricing Model and Valuation of Common shares of three Kazakhstani companies

Course: FIN5210 Financial Derivatives Instructors name: Sang Hoon Lee Students name: Yel !as "aidossov ID: 2012#$10 "e% at &ssanov ID: 2011#0'( Nursultan Seidulla)ev ID: 2012#('0

Fall 2013

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Acknowledgment With great pleasure we want to express our gratitude to all those who assisted us in writing this Term paper. First of all we sincerely want to thank our super isor and mentor professor !r. "ang #oon $ee for gi ing us the alua%le knowledge& his leadership& alua%le ad ices and hints& guidance helped make the 'aper more informati e. We also want to express special thanks to our colleagues& friends& relati es for their regular interest in the progress of writing the Term 'aper& for their support and encouragement.

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11th of !ecem%er 2013 "ang #oon $ee (ssociate 'rofessor )*+,' -ni ersity ./.& !epartment of Finance

!ear !r. $,, *t is a pleasure to write this Term 'aper that was a re0uirement of our course and was interesting work. *t was a challenging assignment in comparison with %achelor courses& %ut the fundamentals that were taken from there with knowledge that we recei ed on Financial !eri ati es course ha e a huge role in writing this Term 'aper. +oreo er& this assignment ena%led us to hone the pro ided knowledge that we were taking during the course& so we ha e not 1ust known the theory of it %ut its use in practice& also. The report contends is a%out ,mpirical research %ased on /apital (sset 'ricing +odel and 2aluation of three companies& including regression analysis and some alid tests as well as the analysis of !i idend !iscount +odel& which is one of the aluation models through which particular in estors can identify the intrinsic alue of the firm. Thus& he can make a decision which company deser es to %e in ested to it. *n the process of work we ha e tried our %est in respect to re0uirements& of course. *f you will find any mistakes or do not understand some details& you are welcome to ad1ust us and ask. "incerely 3ours& .ek4at (ssano 3el4has .aidosso 5ursultan "eidullaye

Executive Summary
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"hould we in est money in securities6 The decision depends on many factors7 the a aila%ility of funds& a willingness to take risks& economic knowledge and experience or the desire to gi e the money in trust stock market professionals. "ome people in est money in securities without making examination on these securities. (s a result these people lose money. "mart in estors make& on the other hand empirical research& pro ide some assumptions& predictions in order to compare the intrinsic alue of the securities with market alue. There were a lot of empirical analyses of /apital (sset 'ricing +odel conducted on )a4akhstan securities in the )a4akhstan "tock ,xchange 8)(",9. (s a result& almost all experiments showed that /('+ was re1ected in the )(",. #owe er& a few )a4akhstani companies ha e entered into $ondon "tock ,xchange 8$",9. "o is /('+ ade0uate in the $", of )a4akhstan companies6 The paper pro ides %rief information on the %ackground and o%1ecti e of the report. There is some information a%out companies 8)a4akhmys& )a4munaiga4 and :haikmunai $$'9 which are descri%ed in the literature re iew. *n +ethodology section& some %asic theoretical aspects of empirical research and aluation methods will %e discussed. Findings and analysis content shows our empirical research with conducting alid tests and calculation process of aluation of common shares and results. *n final section of

/onclusion;<ecommendation& according to our experiment of regression analysis we say that whether /('+ model holds or not in the $"( and %ased on comparison of intrinsic alue with market alue& we gi e recommendation on whether to in est or not in securities of the company.

Table of Contents
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(cknowledgement===========================.2 /o er letter==============================.3 ,xecuti e "ummary===========================> I. Introduction.6 ! a. .ackground==========================.? %. @%1ecti e===========================.? c. "cope===========================.......?-A d. $imitation==========================....A II. "iterature #eview )a4munaiga4 ,'=..========================..B-C )a4akhmys====..=======================..C-11 :haikmunai===========================..11-12 III. $et%odology..&' (& I). *indings and Analysis..(& '6 ). Conclusion and #ecommendation.'6 <eferences===========================..3A

I. +ackground

Introduction

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.ased on the a aila%le data and information of the companies )a4akhmys plc& :#(*)+-5(* $$' and )a4+unaiDas E,& we would like to perform empirical tests that and some aluation analysis of common shares. There are many empirical examinations and aluation methods that exist at the present time. "ome researchers make analysis %ased on historical data and information& and some of them 1ust make critical assumptions and suggestions %y not relying on historical data. -b.ective The main goal of this term paper is experiments on the application of the concept of Erisk-returnF and to determine its suita%ility due to changes in country risk and markets and also comparison of three companies %y aluing their common stocks. *n other words& we will %e conducting regression analyses and tests of the /apital (sset 'ricing model to identify the suita%ility of /('+ in the $"( and estimating each companyGs intrinsic alues using

!i idend !iscount model and /apital (sset 'ricing +odel in order to compare them with the market alues. (s a result we will define in which of these three companies the /('+ holds or not and as well as the findings of intrinsic alues will decide which of these three

companyGs common shares are most desira%le for in estors to %uy. Sco/e The scope of the pro1ect co ers mainly the running the regression analysis of three companies and pro iding some tests as well as the estimation of intrinsic alues of common shares of )a4akhmys& :haikhmunai and )a4+unaiDas co ering t-test& !ur%in-Watson test !i idend !iscount +odel. For %oth empirical tests and di idend discount model& the monthly data from 200B and 2012 is taken. +oreo er& our research group focuses attention of the reader on calculation of re0uired rate of return and risk for the companyGs stock through /apital asset pricing model 8/('+9 in order to assess its attracti eness for the in estor. #owe er %eta is o%tained through two approaches7 one is from regression model and another
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from co ariance and ariance relationship. (nd also we took 2012 as %ase year for calculating !!+ %ecause there is insufficient information for 2012. (dditionally& the estimation of <eturn on ,0uity through !u'ont analysis will %e presented in order to find the expected growth rate. (ll necessary data for assessing stocks of these three companies is retrie ed from %asically +orningstar.com and yahoofinance.com. "imitation @ne of the main limitations of this paper is an a%sence of necessary data which may result in inaccuracy of estimations. +oreo er& little information is a aila%le especially for :haikmunai since its date started from +arch 200B. (ll these factors ser ed as challenge for the research group to make a careful analysis. 2aluation of common stock is ery complex process. The stock re0uires a deeper analysis compared to preferred stock or de%ts and without making some assumptions or predictions& the estimating the intrinsic alue for the common shares is arduous in comparison with other securities. From this fact& our assessing of the security will %e %ased on the assumption concerning the excepted growth rate of di idends.

II*

"iterature review

KazMunaiGaz Exploration
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)a4+unaiDa4 ,xploration 'roduction H"/ is a su%sidiary of 5ational /ompany )a4+unayDas& which %elongs to 5ational Wealth Fund I"amruk-)a4ynaJ. )+D ,' was founded in +arch 200> %y the merger of two hitherto 1oint stock companies& -4enmunaigas and ,m%amunaigas. H"/ E,' E)a4+unaiDa4F is a leading company in the field of hydrocar%on exploration and production in )a4akhstan& and among the leaders of the oil and gas sector in the /aspian region. The main acti ities of oil and gas properties carried out in the /aspian and +angistau %asins of western )a4akhstan. H"/ )+D ,' has production %ranches -4en+unaigas and ,m%a+unaigas& also )a4germunai $$'& /*T*/ /anada ,nergy $imited 8holds C>K in H"/ )ara4han%as+unai9 and )+D ')* Finance .2 8holds 33K in 'etro)a4akhstan *nc.9. The company is de eloping >1 oil and gas fields. -4en+unaigas de elops two ma1or fields& ,m%a+unaigas - a group of 3C fields. *n addition& the /ompany owns shares in associated companies engaged in production oil and natural gas. )+D ,' is one of the top three oil producers in )a4akhstan. The production olume of the /ompany& including shares in companies $$' LH2L )a4germunai& //,$ 8 )ara4han%as+unai9 and 'etro)a4akhstan& in 2012 was 12.2 million tons 82>A thousand %arrels per day9. )+D ,' mission is effecti e exploitation of hydrocar%ons in order to maximi4e the %enefits to shareholders& whilst pro iding long-term economic and social %enefits for the regions of our operations. The main o%1ecti e of )+D ,' is the increase in shareholder alue. )+D ,' seeks to achie e alue growth through growing reser es and production of

hydrocar%ons& impro ing profita%ility of existing assets& and de eloping new %usiness opportunities. 20123?A0 The total num%er of )+D ,' shares is A>&3MA&0>2& of which A0&220&C3M are ordinary oting shares and >&13?&10A are preference shares. (lmost MA&CK of shares %elongs to H"/ 5/ )+D& others are treasury shares8B&1 K9& free float ordinary shares 831&1K9 and preference shares 82&BK9.
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Kazakhmys )a4akhmys is considered to %e the largest copper producer in )a4akhstan and one of the leading copper producers all o er the world. The shares of the company are traded in $ondon stock exchange& #ong )ong and (lmaty. !ue to fully integrated companyGs operations& )a4akhmys is not merely highly profita%le company& %ut also one of the copper producers& which has the lowest costs and flexi%ility to ser e many different customers. (s the copper is one of the key metals& which can %e found in e ery new apartment or office %lock& ehicle and electrical appliance& the demand for it is not falling& meaning the sta%le supply for the corporation. )a4akhmys operates 1? underground and open pit mines across )a4akhstan. *n 2012& company mined 3A.M million tonnes of copper ore and processed it in

10 concentrators. /ompany also operates three coal-fired plants and heating plants that generate the necessary le el of power for copper production and market excess capacity for commercial aims. )a4akhmys is also the largest domestic power pro ider in )a4akhstan with 20K of market share. *n addition to corporationGs 3 capti e power plants& company owns M0K of the countryGs largest power station 8,ki%astu4 D<,"-19& which produced around 1>&3?B DWh of power in 2012& 13K a%o e the pre ious year. a) Analysis of company performance (ccording to the information pro ided on )a4akhstan "tock ,xchange& )a4akhmys shareholders are represented %y following entities7 /uprum #olding $imited N 13M C>> 32M shares& 2M.3CK Fund of 5ational Welfare E"amruk-)a4ynaF H"/ N MB BA? AC3 shares& 11K #arper Finance $imited N 2C A0? C01 shares& M.MMK /ommittee of "tate 'roperty and 'ri ati4ation& +inistry of Finance of the <epu%lic of )a4akhstan N B0 2B? 0M0 shares& 1MK Deneral pu%lic N 230 ?03 BC2 shares& >3.0?K
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Total num%er of stated shares e0uals to AM0 000 000& out of them M3M >1A C?1 shares are outstanding. +ore than >3K of )a4akhmys shares are in hands of the pu%lic& it means that there is interest from the general pu%lic toward in estment in e0uity of the company. "ome portion of people prefers in estment in stocks which is more risky in comparison with placement of deposits in second-tier %anks. +oreo er& e en though the key financial indicators& which are illustrated %elow& show that companyGs earnings are fluctuating indicating the riskiness of in estment in companyGs shares& still 2C polled in estment analysts examining the )a4akhmys '$/ ad ise to in estors to hold their position in the corporation. To %e more precise& according to the analystsG forecasts company is going to outperform the market in the nearest future 8Financial Times $T!& 20139. 200A 200B 200C 2010 2011 ,.*T!( 8Om9 ,'" 8O9 Free /ash Flow 8Om9 /ash /ost of /opper 8-" cents;l%9P +aintenance spend per tonne of copper 8O;t9 2012

2&33? 2&0M? 1&?3> 2&B3M 2&C2M 1&C12 3.02 BCM 33 2.2A A1M 11? 1.13 MAC A2 2.AC A1B BC 2.B0 B2> 11> 0.C> BM 1A>

?A2 1&03B

?>> 1&0AM 1&23A 2&0?M

Furthermore& local analysts of (syl *n est gi e the ad ice for in estors on shares of )a4akhmys '$/ to %uy and hold securities of this company due to strong operating results and prospects for a reco ery in demand for copper from /hina and )a4+unaiDas. (nalysts also draw the attention of in estors on the strong characteristics of the issuer in terms of its efficiency& profita%ility and %alance sheet indicators and lagging stock price indicators of the company from the o erall market 8'rodengi.k4& 20129. *n accordance with analysis of related literature& in estment in shares of )a4akhmys has following pros and cons respecti ely7

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)a4akhmys is engaged in the cyclical %usiness& conse0uently& its re enue and earnings are hea ily influenced %y aggregate %usiness acti ity. *n terms of stocks& this company has high %eta and its rate of return has greater changes than the o erall market rate of return. This is negati e side of the industry& it adds risk& %ut at the same time return increases.

)a4akhmys has differentiation competiti e strategy which is explained %y the fact that company is uni0ue in the industry& thatGs why it is extremely important for the %uyers of their product. This factor contri%utes to high re enues. There is also influence of the cyclical %usiness& %ut ne ertheless this factor may positi ely affect the di idend policy in the future.

Zhaikmunai :haikmunai& a $imited 'artnership 8the E'artnershipF or E:haikmunaiF9 was esta%lished in )a4akhstan in 1CCA for the purpose of exploration and de elopment of /hinare skoye oil and gas condensate field in the Western )a4akhstan <egion. The 'artnership carries out its acti ities in accordance with the /ontract for (dditional ,xploration& 'roduction and 'roduction N "haring of /rude #ydrocar%ons in the /hinare skoye oil and gas condensate field dated in @cto%er 31& 1CCA in accordance with the license +D 5o. 2M3! for the exploration and production of hydrocar%ons in /hinare skoye oil and gas condensate field %etween the "tate /ommittee of *n estments of the <epu%lic of )a4akhstan and the 'artnership. The registered address of the 'artnership is7 MC;2& 'rospect , ra4ia& -ralsk& the <epu%lic of )a4akhstan. The /hinare skoye field co ers approximately 2A> s0uare kilometers and is situated in the West )a4akhstan 'ro ince& near the %order %etween )a4akhstan and the <ussian Federation& and close to se eral ma1or pipelines. The West )a4akhstan administrati e center of -ralsk 8or @ral& in )a4akh9 is located approximately B0 kilometers southwest of /hinare skoye field.
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:haikmunaiGs other assets at this time include the <ostoshinskoye field& the !ar4hinskoye field& and the 3u4hno-Dremyachenskoye field& which are all situated in the icinity of the /hinare skoye field& proposing direct operational synergies. :haikmunai controls the marketing& pricing and transportation of its li0uids through the transport of its crude oil and sta%ili4ed condensate from the /hinare skoye field to its loading rail terminal in <ostoshi near -ralsk through its own 120-kilometer pipeline and through the road transport of its $'D production in %ullet trucks from the /hinare skoye to the rail terminal. :haikmunai is an independent oil and gas enterprise presently engaging in the production& expansion and exploration of oil and gas in north-western )a4akhstan. *ts Dlo%al !epositary <eceipts 8D!<s9 are listed on the $ondon "tock ,xchange 8$",9 8Ticker sym%ol7 :)+9. :haikmunaiGs main o%1ecti es are !eli er @rganic Drowth which includes !ou%le production to achie e o er 100&000 %oepd %y 201? and 'ursue efficiency de elopments throughout all operations. ,xpand and +oneti4e the <eser e or <esource .ase which are Fully de elop the /hinare skoye field 2' reser es of M22 million %oe& Target the /hinare skoye field 3' reser es of MMC million %oe and !e elop and appraise the newly ac0uired ad1acent fields 8<ostoshinskoye& !ar4hinskoye and 3u4hno-Dremyachenskoye9 with 2' reser es of 1BA million %oe and 3' reser es of 1BA million %oe. !e elop a +ulti-Field +odel to !ri e Future Drowth which includes $e erage the existing /hinare skoye infrastructure to treat gascondensate from neigh%oring fields and 'ursue the 0uest for further reser es at low finding costs. Focus on !eli ering "hareholder 2alue which includes 'ursue a %alanced approach to in estment in growth o er the long-term& ,nsure strong operating cash flow generation guaranteeing the expenditure programs and maintain a sound capital structure& a clear financial policy and a regular di idend payout. III. $et%odology

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(n empirical research is a scientific study which is %ased on facts. (ny scientific research starts with the collection& classification and generali4ation of the facts. The concept of LfactL has the following ma1or meanings7 19 "ome fragment of reality& o%1ecti e e ents& the results that %ased on either to the o%1ecti e reality 8Lfacts of realityL9& or to the realm of consciousness and knowledge 8Lfacts of consciousnessL9Q 29 )nowledge of any e ent& phenomenon& which credi%ility is pro edQ 39 (ny assumptions or suggestions that fixing empirical knowledge which recei ed during experiments and o%ser ations. The internal structure of empirical le el is formed into two su%le els7 a9 !irect o%ser ation and experiments which result are referred to these o%ser ationsQ %9 .y means of cogniti e procedures& transition from o%ser ations to empirical dependences and facts is carried out. The acti ity-%ased nature of empirical research at le el of o%ser ation is most distinctly shown in situations when o%ser ation is carried out during real experiment. .y tradition& the experiment is opposed to o%ser ation which is out of experiment. $etRs note that a core of empirical research is an experiment N test of the studied phenomena in controlla%le and managea%le conditions. The distinction %etween an experimentation and o%ser ation is that experimental conditions are controlled and managed& %ut in o%ser ation the processes are gi en %ased on the natural course of e ents. Without denying specifics of these two types of cogniti e acti ities& it is necessary to pay attention to their common generic features. First of all we need to consider in more detail what the feature of experimental research as practical acti ity is. ,xperimental work is a specific form of natural interaction& and interacti e fragments of the nature in the experiment always appear as o%1ects with functionally allocated properties. Ca/ital Asset ,ricing $odel
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@ne of the main pro%lems that can %e encountered when assessing the alue of the assets is to determine the relationship %etween risk and return. The market pattern Lthe higher the risk& the higher the rate of returnL is not in dou%t. *n this case& each in estor forms its own forecasts of relati ely marked parameters. #owe er& the market tends to keep mo ing in the direction of a certain e0uili%rium aluations of risk and return on assets. *n a well-de eloped market& new information is 0uickly reflected in the market alue of assets& so for these conditions& there is a model that would ade0uately descri%e the relationship %etween risk and return of assets. "uch a model is de eloped in the mid ?0s. %y William "harpe and Hohn $intern and was named the aluation of financial assets 8capital asset pricing model - /('+9. 8.essono a& 200A9 /apital (sset 'ricing +odel 8/('+9 N a model for the economic e aluation of shares& securities& deri ati es and ; or assets %y relating risk and expected return. /('+ is %ased on the idea that in estors demand additional expected return 8risk premium9 if they are asked to take on additional risk. 8.essono a& 200A9 *n 1CC0& William "harpe won the 5o%el 'ri4e in the realm of economics for his contri%utions to the theory of pricing financial assets& that is so-called the /apital (sset 'ricing +odel 8/('+9. This is a single-factor model& the key factor is a risk. The main result of /('+ is the esta%lishment of the relationship %etween return and risk of the asset for the e0uili%rium of the market. @ne of the most important things is the fact that in the making choice& the in estor must take into account not the entire risk of the security& %ut the only systematic or non-di ersifia%le. This part of the risk of an asset is closely linked to the o erall market and 0uantitati ely represented %y coefficient beta which was introduced %y William "harpe in his one-factor model. 8.essono a& 200A9 /('+ can %e determined in the following way7
RM R f Ri = R f + iM 2 M

819

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Where Ri =expected return on e0uili%rium of the securityQ RM N return on the marketQ

2 M N the ariance of the market or its riskQ

R f N risk free rateQ iM N the co ariance

%etween the return of financial asset and return of the market. 'articular attention should %e paid to S coefficient model& which characteri4es the sensiti ity of the asset to market changes. The coefficient S of /('+ is the ratio of7

iM 2 M

This ratio is used to measure the market risk and the relationship %etween the return of the financial asset and the return of the asset market. We can rewrite the formula 819 %y the following way7
Ri = R f + 8 R M R f 9

829

#ence& it clear that the /('+ is %ased on following key aria%les7 <f -the risk-free rate of an in estment <m - the o erall stock market risk S - the stockRs %eta The capital asset pricing model /('+ - is single-factor model. *t is 0uite widespread. .ut like any other models& it has %oth ad antages and disad antages. The main ad antage is that this model clearly descri%es the relationship %etween return and risk. (s well as its main draw%ack is that it is one factor and& therefore& cannot take into account all the factors affecting the return. (S%ar/e, Alexander, +ailey0 (1123. There ha e %een se eral attempts to test the implications of the /('+ using historical rates of returns of securities and historical rates of return on a market index. The most famous studies according to !iacogiannis 81CC>9 were7 $intner 81C?M9& whose study was reproduced %y
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!ouglas 81C?B9& Haco% 81CA19& +iller and "choles 81CA29& and .lack& Hensen and "choles 81CA29& .lume and Friend 81CA39& and Fama and +ac.eth 81CA39.

*nitial tests of the /('+ were performed %y .lack& Hensen and "choles - .H" 81CA29 and Fama and +ac.eth - F+ 81CA39. These tests in ol ed a two-stage procedure. .H" 81CA29 estimated %etas using the monthly returns of each stock on the 53",& o er the 1C2?-1C30 period& and an e0ually weighted portfolio of all stocks on the 53",. Their findings showed that /('+ did not hold in the examined period. Though& some criticisms of /('+ appeared. @ne ery famous critic in literature %elongs to Fama and French. *n 1CC2& they disco ered a negati e relationship %etween risk and return. "ince then& a ery important 0uestion is %eing asked7 E*s .eta dead6 F. (nd if the answer is yes& what is the true nature and measure of risk6 Fama and French came up with the conclusion that a more realistic approach of the risk in the market is the multi-index models. They argued that si4e of the firm and the %ook to market alue ha e a significant influence on the performance of a stock.

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We demonstrate the tests of the /('+ with simple numerical example that uses monthly data from 200B through 2012. This example starts with rates of return on three securities and the $ondon "tock ,xchange. Through the program which is called ,-2iews we will run the regression. (s a result we will pro ide some interpretation %ased on risk coefficient and <s0uare and conduct some tests such as t-test and !ur%in-Watson test. 4ividend 4iscount $odel 544$3 ( lot of stock exchanges allow in estors to in est in se eral securities including stocks. To find necessary information a%out stock& in estors employ different types of in estment analyses including fundamental analysis. +any methods for calculating the intrinsic alue of a stock is used. *n estors fre0uently apply the di idend discount model to estimate the intrinsic alue of a stock. .ased on this model& they %uy& hold or sell the stock. 8D@TTW($!& 20129 The di idend discount model pro ides a method of ela%orating an explicit expected return for the stock market. *t is a means of assessing %ased on theory that a stock is e0ual to the discounted sum of all its future di idend payments. *n other words& the intrinsic alue of a stock is determined similar to the present alue of future di idends. The stocks are alued %ased on the net present alue of the future di idends. The predicting of future di idends is sometimes rather pro%lematic. 8D@TTW($!& 20129. "e eral methods of the di idend discount model are employed %y the financial analytics. The easiest method is that the alue of a stock e0uals to the alue for a perpetual annuity with a constant le el of payments. '0 T !i
1

; 8k N g9

1'

@ther methods are %ased on increasing& stagnation or decreasing of di idends. The increasing or decreasing of di idends can %e in two ways7 linear or nonlinear. Financial analytics usually consider possi%le increase rate of di idends with the aid of financial statements of companies or historical information analysis. *n order to examine historical data& we should disco er the existence of such data. The possi%le growth rate of di idends relies on factors like di idend policy& profit margin& return on e0uity and inde%tedness. 8D@TTW($!& 20129. (ccording to .lackwell& Driffiths and Winters 8200A9& stocks are di ided %y stocks that pay di idends and stocks that do not pay di idends. (n in estor who chooses the stock which gi es di idend looks forward to take part in two sets of future cash flows7 a stream of future di idends and a sales price when the stock is sold. .y assessing a di idend paying stock& we should make some hypothesis a%out di idend growth7 no growth in di idends& constant growth in di idends or non-constant growth in di idends. #owe er& the hypothesis a%out no growth in di idends could appear insu%stantial. The speculation of constant di idends is appropriate for the peculiarities of preferred stock& which contains a stated di idend of a fixed amount. (ll preferred stock di idends ha e to %e fully dis%ursed %efore any di idend on common stock can %e dis%ursed. "upposition of constant growth in di idends is accepta%le for the %ig& sta%le& di idend-paying companies& which are usually named as E%lue chipF firms. ( more general kind of assumption is the non-constant growth in di idends which says that di idends are supposed to go down to a rate of growth that is sustaina%le o er the long run. There are often three-stage& four-stage non-constant growth models in di idends are employed in practice. 8D@TTW($!& 20129. The price of a share of stock is the present alue of all expected future di idends per share discounted at market capitali4ation rate7

1+

Vj T alue of common stock 1Q Dt T di idend during period tQ k T re0uired rate of return of stock j or cost of e0uityQ t T the holding period. The model was initially de eloped %y Williams 81C3B9 and afterwards expanded %y Dordon 81C?39 8.realey U+yers 820007 ?>??9.9 *n order to apply the a%o e e0uation& an in estor has to predict all future di idends. (nd additionally specific assumptions ha e to %e made& these assumptions are %ased on di idend growth rates. Thus& the di idend per share at any time t can %e expressed as the di idend per share at time t-1 times the growth rate of gt 8"harpe& 1CCC97 !t T !t-1 P 81 V gt9 We made the aluation of common stock %ased on ETwo-stage !i idend !iscount +odelF. The model consists of two stages of growthQ an expected growth rate that lasts EtF years and a steady state growth rate that lasts infinitely7

Where P T the intrinsic alue of common stockQ !0 T !i idends per share at year 2012Q g T expected growth rate that lasts t yearsQ r T cost of e0uity '5 T 'rice or Terminal alue at the end of year 5
1,

(ccording to our assumption& the expected growth rate which we are going to estimate %y formula g = Return on e uity ! Retention Ratio /ost of e0uity will %e estimated according to the /apital (sset 'ricing +odel7
Ri = R f + 8 R M R f 9 &

in this e0uation risk free rate will %e taken from -) official sites that

e0uals to the A.>KQ we will calculate the market return %ased on $ondon "tock ,xchange of monthly data starting from 200B till 2012& as all companies )a4akhmys& )a4munaiga4 and :haikmunai $$' are listed in this indexQ the will %e estimated %ased on the historical stock prices of two companies also referring to the monthly data. From historical prices we will o%tain monthly returns and use formula for finding the 7 " = #o$ariance (%a&ak'mys, ()*) + Variance (()*) " = #o$ariance (%a&Munai,as, ()*) + Variance (()*)" = #o$ariance (.'aikmunai, ()*) + Variance (()*)(s mentioned a%o e& the formula for calculating the expected growth rate that we are going to use7 g = Return on e uity ! Retention Ratio For estimating <eturn on e0uity we will employ !u'ont analysis and Financial "tatement of the two companies for 20127 R/* = Profit Margin (Profit+)ales) ! 0otal Asset 0urno$er ()ales+Assets) ! * uity Multiplier (Assets+* uity) <etention ratio will %e estimated %y the following formula7

20

Retention Ratio = (1 2 DP) for 3413+*P) (or 5et 6ncome) for 3413) = (1 2 Pay/ut ratio) (fter that we will compute the present alue of all expected future di idends per share discounted at the cost of e0uity. The terminal alue will %e computed after fi e years %y this formula7 '5 T ,xpected di idends per share at end of year 5;8/ost of e0uity N D!' steady state growth rate9 I). *mpirical Researc' The data that examined here are the monthly returns for the three companies. The data co er for )a4munaiga4 and )a4akhmys !ecem%er 200A through !ecem%er 2012 and for :haikmunai +arch 200B through !ecem%er 2012. The market return is measured for three companies using the $ondon "tock ,xchange. #ere are the alues7
Kazakhmys ate Close 31-Dec-2012 778 30-Nov-2012 713.5 31-Oct-2012 709 28-Sep-2012 692.5 31-Aug-2012 593 31-Jul-2012 705 29-Jun-2012 721.5 31-May-2012 665 30-Ap -2012 861 30-Ma -2012 908 29-!e"-2012 1109 31-Jan-2012 1136 30-Dec-2011 927 30-Nov-2011 925 31-Oct-2011 927.5 30-Sep-2011 793 31-Aug-2011 1091 29-Jul-2011 1348 30-Jun-2011 1380 31-May-2011 1314 28-Ap -2011 1379 31-Ma -2011 1394 !eturn "#"$"%$$ "#""(%') "#"*%,*) "#&())$& -"#&+,,) -"#"**,) "#",'$(* -"#**)(' -"#"+&)( -"#&,&*' -"#"*%)) "#**+'+, "#""*&(* -"#""*) "#&($("$ -"#*)%&' -"#&$"(+ -"#"*%&$ "#"+"**, -"#"')&' -"#"&")( -"#"%'(% ate 31-Dec-2012 30-Nov-2012 31-Oct-2012 28-Sep-2012 31-Aug-2012 31-Jul-2012 29-Jun-2012 31-May-2012 30-Ap -2012 30-Ma -2012 29-!e"-2012 31-Jan-2012 30-Dec-2011 30-Nov-2011 31-Oct-2011 30-Sep-2011 31-Aug-2011 29-Jul-2011 30-Jun-2011 31-May-2011 28-Ap -2011 31-Ma -2011 LSE Close 1088 977.5 975.5 943 993.5 969.5 1004 1000 1088 1034 902 870 795 860.5 900 815 920.5 997 1061 980.5 871.5 832.5 !eturn "#&&%"'% "#""*"+ "#"%''(' -"#"+",% "#"*')++ -"#"%'%( "#""' -"#",",, "#"+***' "#&'(%'& "#"%(),* "#"$'%' -"#")(&* -"#"'%,$ "#&"'*$' -"#&&'(& -"#")()% -"#"("%* "#",*&"& "#&*+")* "#"'(,') -"#")+

*indings and Analysis

21

28-!e"-2011 31-Jan-2011 31-Dec-2010 30-Nov-2010 29-Oct-2010 30-Sep-2010 31-Aug-2010 30-Jul-2010 30-Jun-2010 31-May-2010 30-Ap -2010 31-Ma -2010 26-!e"-2010 29-Jan-2010 31-Dec-2009 30-Nov-2009 30-Oct-2009 30-Sep-2009 31-Aug-2009 31-Jul-2009 30-Jun-2009 29-May-2009 30-Ap -2009 31-Ma -2009 27-!e"-2009 30-Jan-2009 31-Dec-2008 28-Nov-2008 31-Oct-2008 30-Sep-2008 29-Aug-2008 31-Jul-2008 30-Jun-2008 30-May-2008 30-Ap -2008 31-Ma -2008 29-!e"-2008 31-Jan-2008 31-Dec-2007

1444 1506 1614 1386 1316 1452 1156 1216 994 1185 1404 1527 1341 1219 1328 1233 1089 1074 988.5 856.5 630 690.5 535 371 261.5 223.75 231 259.75 285.5 580 1292 1499 1592 1690 1582 1597 1546 1215 1371

-"#"'&&) -"#"(($& "#&('+"* "#"+%&$& -"#"$%(( "#*+("++ -"#"'$%' "#**%%' -"#&(&&, -"#&++$, -"#","++ "#&%,)"* "#&""",* -"#",*", "#"))"', "#&%**%& "#"&%$(( "#",('$+ "#&+'&&( "#%+$+*' -"#",)(* "#*$"(+' "#''*"'$ "#'&,)%, "#&(,)&+ -"#"%&%$ -"#&&"(, -"#"$"&$ -"#+"))( -"#++&", -"#&%,"$ -"#"+,'* -"#"+)$$ "#"(,*(, -"#""$%$ "#"%*$,, "#*)*'*, -"#&&%)$ #

28-!e"-2011 31-Jan-2011 31-Dec-2010 30-Nov-2010 29-Oct-2010 30-Sep-2010 31-Aug-2010 30-Jul-2010 30-Jun-2010 31-May-2010 30-Ap -2010 31-Ma -2010 26-!e"-2010 29-Jan-2010 31-Dec-2009 30-Nov-2009 30-Oct-2009 30-Sep-2009 31-Aug-2009 31-Jul-2009 30-Jun-2009 29-May-2009 30-Ap -2009 31-Ma -2009 27-!e"-2009 30-Jan-2009 31-Dec-2008 28-Nov-2008 31-Oct-2008 30-Sep-2008 29-Aug-2008 31-Jul-2008 30-Jun-2008 30-May-2008 30-Ap -2008 31-Ma -2008 29-!e"-2008 31-Jan-2008 31-Dec-2007

900 846 838 758.5 734 681 660.5 647 563.5 642 685 710.5 665 641.5 718 752.5 851 856 805.5 712 702.5 689.5 749 565.5 434.25 481.25 510 609 558.5 863 793 831 780 1027 1077 1208 1359 1691 1979

"#"(%,% "#""$+') "#&"',&* "#"%%%)$ "#")),*) "#"%&"%) "#"*",(( "#&',&,& -"#&***) -"#"(*)) -"#"%+,$ "#"(,'*& "#"%((%% -"#&"(++ -"#"'+,+ -"#&&+)+ -"#""+,' "#"(*($' "#&%&%* "#"&%+*% "#"&,,+' -"#")$'' "#%*''$* "#%"**'+ -"#"$)(( -"#"+(%) -"#&(*+( "#"$"'*& -"#%+*,' "#",,*)* -"#"'+)% "#"(+%,+ -"#*'"+& -"#"'('% -"#&",'' -"#&&&&& -"#&$(%% -"#&'++% #

KazMunai.as ate Close 31-Dec-2012 18 30-Nov-2012 18.7 31-Oct-2012 17.75 28-Sep-2012 18.45 31-Aug-2012 18 31-Jul-2012 18.12 29-Jun-2012 16.9

!eturn -"#"%)'% "#"+%+*& -"#"%)$' "#"*+ -"#""((* "#")*&,$ -"#"$"'*

ate 31-Dec-2012 30-Nov-2012 31-Oct-2012 28-Sep-2012 31-Aug-2012 31-Jul-2012 29-Jun-2012

LSE Close 1088 977.5 975.5 943 993.5 969.5 1004

!eturn 0.113043 0.00205 0.034464 -0.05083 0.024755 -0.03436 0.004

22

31-May-2012 30-Ap -2012 30-Ma -2012 29-!e"-2012 31-Jan-2012 30-Dec-2011 30-Nov-2011 31-Oct-2011 30-Sep-2011 31-Aug-2011 29-Jul-2011 30-Jun-2011 31-May-2011 28-Ap -2011 28-Ma -2011 28-!e"-2011 31-Jan-2011 31-Dec-2010 30-Nov-2010 29-Oct-2010 30-Sep-2010 31-Aug-2010 30-Jul-2010 30-Jun-2010 31-May-2010 30-Ap -2010 31-Ma -2010 26-!e"-2010 29-Jan-2010 31-Dec-2009 30-Nov-2009 30-Oct-2009 30-Sep-2009 31-Aug-2009 31-Jul-2009 30-Jun-2009 29-May-2009 30-Ap -2009 31-Ma -2009 27-!e"-2009 30-Jan-2009 31-Dec-2008 28-Nov-2008 31-Oct-2008 30-Sep-2008 29-Aug-2008 31-Jul-2008 17-Jun-2008 30-May-2008 30-Ap -2008 31-Ma -2008

18.58 20 20.28 17.9 15.8 14.95 16.1 16.98 14.66 16.95 18.5 19.9 21.55 22.65 23.22 23 21.5 19.83 19.2 17.2 17.67 17.64 19.56 18.6 21.45 24.6 24.67 24.14 25.4 24.9 24.1 23.65 22.38 22 21.55 19 21.99 17.76 14.9 12.27 12.7 12.6 13.41 14 15.5 23.15 25.5 30.22 32.45 29.4 25.05

-"#")& -"#"&%,& "#&%*$(& "#&%*$&& "#"+(,+( -"#")&'% -"#"+&,% "#&+,*+' -"#&%+& -"#",%), -"#")"%+ -"#")(+) -"#"',+) -"#"*'++ "#""$+(+ "#"($)() "#",'*&( "#"%*,&* "#&&(*)$ -"#"*(( "#""&)"& -"#"$,&( "#"+&(&% -"#&%*,) -"#&*,"+ -"#""*,' "#"*&$++ -"#"'$(& "#"*"", "#"%%&$+ "#"&$"*) "#"+()') "#"&)*)% "#"*",,* "#&%'*&& -"#&%+$) "#*%,&)( "#&$&$'( "#*&'%'' -"#"%%,( "#"")$%) -"#"("' -"#"'*&' -"#"$()) -"#%%"'+ -"#"$*&( -"#&+(&$ -"#"(,)* "#&"%)'& "#&)%(+% "#"&'&)

31-May-2012 30-Ap -2012 30-Ma -2012 29-!e"-2012 31-Jan-2012 30-Dec-2011 30-Nov-2011 31-Oct-2011 30-Sep-2011 31-Aug-2011 29-Jul-2011 30-Jun-2011 31-May-2011 28-Ap -2011 31-Ma -2011 28-!e"-2011 31-Jan-2011 31-Dec-2010 30-Nov-2010 29-Oct-2010 30-Sep-2010 31-Aug-2010 30-Jul-2010 30-Jun-2010 31-May-2010 30-Ap -2010 31-Ma -2010 26-!e"-2010 29-Jan-2010 31-Dec-2009 30-Nov-2009 30-Oct-2009 30-Sep-2009 31-Aug-2009 31-Jul-2009 30-Jun-2009 29-May-2009 30-Ap -2009 31-Ma -2009 27-!e"-2009 30-Jan-2009 31-Dec-2008 28-Nov-2008 31-Oct-2008 30-Sep-2008 29-Aug-2008 31-Jul-2008 30-Jun-2008 30-May-2008 30-Ap -2008 31-Ma -2008

1000 1088 1034 902 870 795 860.5 900 815 920.5 997 1061 980.5 871.5 832.5 900 846 838 758.5 734 681 660.5 647 563.5 642 685 710.5 665 641.5 718 752.5 851 856 805.5 712 702.5 689.5 749 565.5 434.25 481.25 510 609 558.5 863 793 831 780 1027 1077 1208

-0.08088 0.052224 0.146341 0.036782 0.09434 -0.07612 -0.04389 0.104294 -0.11461 -0.07673 -0.06032 0.082101 0.125072 0.046847 -0.075 0.06383 0.009547 0.104812 0.033379 0.077827 0.031037 0.020866 0.148181 -0.12227 -0.06277 -0.03589 0.068421 0.036633 -0.10655 -0.04585 -0.11575 -0.00584 0.062694 0.13132 0.013523 0.018854 -0.07944 0.324492 0.302245 -0.09766 -0.05637 -0.16256 0.090421 -0.35284 0.088272 -0.04573 0.065385 -0.24051 -0.04643 -0.10844 -0.11111

2#

29-!e"-2008 31-Jan-2008 31-Dec-2007

24.7 26.1 31

-"#"+%(' -"#&+,"( #

29-!e"-2008 31-Jan-2008 31-Dec-2007

1359 1691 1979

-0.19633 -0.14553 #

/haikmunai ate Close 31-Dec-2012 10.7 30-Nov-2012 11 31-Oct-2012 10.7 28-Sep-2012 10.2 31-Aug-2012 9.7 31-Jul-2012 8.25 29-Jun-2012 8.5 31-May-2012 9.75 30-Ap -2012 10.75 30-Ma -2012 11.19 29-!e"-2012 11.4 31-Jan-2012 10.8 30-Dec-2011 9.71 30-Nov-2011 9 31-Oct-2011 8.28 30-Sep-2011 7.4 31-Aug-2011 8.2 29-Jul-2011 9.9 30-Jun-2011 9.95 31-May-2011 11 28-Ap -2011 11.87 31-Ma -2011 12.4 28-!e"-2011 12.99 31-Jan-2011 12.27 31-Dec-2010 12 30-Nov-2010 11.5 29-Oct-2010 10.6 30-Sep-2010 8 31-Aug-2010 7 30-Jul-2010 7.4 30-Jun-2010 7.4 31-May-2010 7.9 30-Ap -2010 8.54 31-Ma -2010 8.75 26-!e"-2010 7.85 29-Jan-2010 8.25 31-Dec-2009 8.5 30-Nov-2009 6.5 30-Oct-2009 4.7 30-Sep-2009 4.75 31-Aug-2009 5 31-Jul-2009 4.4

!eturn -0.02727 0.028037 0.04902 0.051546 0.175758 -0.02941 -0.12821 -0.09302 -0.03932 -0.01842 0.055556 0.112255 0.078889 0.086957 0.118919 -0.09756 -0.17172 -0.00503 -0.09545 -0.07329 -0.04274 -0.04542 0.05868 0.0225 0.043478 0.084906 0.325 0.142857 -0.05405 0 -0.06329 -0.07494 -0.024 0.11465 -0.04848 -0.02941 0.307692 0.382979 -0.01053 -0.05 0.136364 -0.2

ate 31-Dec-2012 30-Nov-2012 31-Oct-2012 28-Sep-2012 31-Aug-2012 31-Jul-2012 29-Jun-2012 31-May-2012 30-Ap -2012 30-Ma -2012 29-!e"-2012 31-Jan-2012 30-Dec-2011 30-Nov-2011 31-Oct-2011 30-Sep-2011 31-Aug-2011 29-Jul-2011 30-Jun-2011 31-May-2011 28-Ap -2011 31-Ma -2011 28-!e"-2011 31-Jan-2011 31-Dec-2010 30-Nov-2010 29-Oct-2010 30-Sep-2010 31-Aug-2010 30-Jul-2010 30-Jun-2010 31-May-2010 30-Ap -2010 31-Ma -2010 26-!e"-2010 29-Jan-2010 31-Dec-2009 30-Nov-2009 30-Oct-2009 30-Sep-2009 31-Aug-2009 31-Jul-2009

LSE Close 1088 977.5 975.5 943 993.5 969.5 1004 1000 1088 1034 902 870 795 860.5 900 815 920.5 997 1061 980.5 871.5 832.5 900 846 838 758.5 734 681 660.5 647 563.5 642 685 710.5 665 641.5 718 752.5 851 856 805.5 712

!eturn 0.113043 0.00205 0.034464 -0.05083 0.024755 -0.03436 0.004 -0.08088 0.052224 0.146341 0.036782 0.09434 -0.07612 -0.04389 0.104294 -0.11461 -0.07673 -0.06032 0.082101 0.125072 0.046847 -0.075 0.06383 0.009547 0.104812 0.033379 0.077827 0.031037 0.020866 0.148181 -0.12227 -0.06277 -0.03589 0.068421 0.036633 -0.10655 -0.04585 -0.11575 -0.00584 0.062694 0.13132 0.013523

2$

30-Jun-2009 29-May-2009 30-Ap -2009 31-Ma -2009 27-!e"-2009 30-Jan-2009 31-Dec-2008 28-Nov-2008 31-Oct-2008 30-Sep-2008 29-Aug-2008 30-Jul-2008 30-Jun-2008 30-May-2008 30-Ap -2008 31-Ma -2008 28-Ma -2008

5.5 4.5 4.15 2 2.35 2 2.75 4.63 4.75 8 13.7 14.5 15.9 15.1 11.95 10.5 10.4

0.222222 0.084337 1.075 -0.14894 0.175 -0.27273 -0.40605 -0.02526 -0.40625 -0.41606 -0.05517 -0.08805 0.05298 0.263598 0.138095 0.009615 #

30-Jun-2009 29-May-2009 30-Ap -2009 31-Ma -2009 27-!e"-2009 30-Jan-2009 31-Dec-2008 28-Nov-2008 31-Oct-2008 30-Sep-2008 29-Aug-2008 31-Jul-2008 30-Jun-2008 30-May-2008 30-Ap -2008 31-Ma -2008 29-!e"-2008

702.5 689.5 749 565.5 434.25 481.25 510 609 558.5 863 793 831 780 1027 1077 1208 1359

0.018854 -0.07944 0.324492 0.302245 -0.09766 -0.05637 -0.16256 0.090421 -0.35284 0.088272 -0.04573 0.065385 -0.24051 -0.04643 -0.10844 -0.11111 #

#ere are the results of a regression fit7 6a7muniaga7

Depen$ent#%a &a"le'#(A)M*N Met+o$'#,ea-t#S.ua eDate'#12/11/13###0&1e'#04'12 Sa1ple'#2008M01#2012M12 2nclu$e$#o"-e vat&on-'#60 (A)M*N34516745268,SA 4oe99&c&ent 4516 4526 <--.ua e$ -0.002705 0.304331 St$.#: o 0.012604 0.110258 t-Stat&-t&c -0.214621 2.760171 ; o".## 0.8308 0.0077 -0.003682

0.116103####Mean#$epen$ent#va

25

A$=u-te$#<--.ua e$ S.:.#o9# eg e--&on Su1#-.ua e$# e-&$ ,og#l&>el&+oo$ !--tat&-t&c ; o"5!--tat&-t&c6

0.100864####S.D.#$epen$ent#va 0.097588####A>a&>e#&n9o#c &te &on 0.552363####Sc+?a @#c &te &on 55.50049####Aannan-Bu&nn#c &te . 7.618541####Du "&n-Cat-on#-tat 0.007720

0.102917 -1.783350 -1.713538 -1.756043 1.710942

6a7ak%mys
Depen$ent#%a &a"le'#(A)MDS Met+o$'#,ea-t#S.ua eDate'#12/11/13###0&1e'#04'16 Sa1ple'#2008M01#2012M12 2nclu$e$#o"-e vat&on-'#60 (A)MDS34516745268,SA 4oe99&c&ent 4516 4526 <--.ua e$ A$=u-te$#<--.ua e$ S.:.#o9# eg e--&on Su1#-.ua e$# e-&$ ,og#l&>el&+oo$ !--tat&-t&c ; o"5!--tat&-t&c6 0.011164 0.683307 St$.#: o 0.021565 0.188654 t-Stat&-t&c 0.517678 3.622002 ; o".## 0.6067 0.0006 0.008971 0.183325 -0.709163 -0.639352 -0.681856 1.448329

0.184464####Mean#$epen$ent#va 0.170403####S.D.#$epen$ent#va 0.166976####A>a&>e#&n9o#c &te &on 1.617105####Sc+?a @#c &te &on 23.27490####Aannan-Bu&nn#c &te . 13.11890####Du "&n-Cat-on#-tat 0.000616

8%aikmunai
Depen$ent#%a &a"le'#)AA2( Met+o$'#,ea-t#S.ua eDate'#12/11/13###0&1e'#04'21 Sa1ple#5a$=u-te$6'#2008M01#2012M10 2nclu$e$#o"-e vat&on-'#58#a9te #a$=u-t1ent)AA2(34516745268,SA2 4oe99&c&ent 4516 4526 <--.ua e$ A$=u-te$#<--.ua e$ S.:.#o9# eg e--&on Su1#-.ua e$# e-&$ ,og#l&>el&+oo$ !--tat&-t&c ; o"5!--tat&-t&c6 0.018285 0.644823 St$.#: o 0.026377 0.236041 t-Stat&-t&c 0.693218 2.731821 ; o".## 0.4910 0.0084 0.019945 0.211908 -0.338854 -0.267804 -0.311178 1.780661

0.117594####Mean#$epen$ent#va 0.101837####S.D.#$epen$ent#va 0.200829####A>a&>e#&n9o#c &te &on 2.258604####Sc+?a @#c &te &on 11.82676####Aannan-Bu&nn#c &te . 7.462843####Du "&n-Cat-on#-tat 0.008409

The estimate of three %etas is7 1.'1956a7munaiga730 1.62'56a7ak%mys30 1.69958%aikmunai3. (s we see stocks of 6a7akmys is dou%le riskier than 6a7munaiga70

2(

%ut a little %it riskier than 8%aikmunai. #owe er all three companiesG stocks ha e less price olatility than the market and are less risky. *f we conduct t7test for the hypothesis 7 84 9 " = 4 819 " : 4 6a7munaiga7: %a&munaiga& return = 74-443;4< = 4->4?>>1 Market Return
se (4-413@4?) (4-1143<A) (4-44;;)

R3 = 4-11@14>

p7$alue (4-A>4A)

t ="+se(") =4->4?>>1+4-1143<A= 3-;@

6a7ak%mys: %a&ak'mys return = 4-4111@?= 4-@A>>4;Market Return

se (4-431<@<) (4-1AA@<?) (4-444@)

R3 = 4-1A??@?

p7$alue (4-@4@;)

t ="+se(") =4-@A>>4;+4-1AA@<?= >-@33443

8%aikmunai: .'aikmunai return = 4-41A3A<= 4-@??A3>Market Return

se (4-43@>;;) (4-3>@4?1) (4-44A?)

R3 = 4-11;<B?

p7$alue (4-?B14)

t ="+se(") =4-@??A3>+4-3>@4?1= 3-;>1A31

*f we look at T-ta%le statistics& all t-statistics of three companies %ased on coefficient %eta at MK significance le el are statistically significant and as a result we can re1ect the null hypothesis since the pro%a%ility alue 8p7$alue) is smaller than 0&0M. This actually means that the coefficient is significantly different from 4ero& which is contradiction to the theory of /('+. #owe er if we look at the t statistics of each intercepts which are )a4munaiga4

2'

8-0.21>9& )a4akhmys80.M1A?9 and :haikmunai 80.?C39 and also their p7$alues are greater than 0.0M& we say that they are all statistically insignificant at MK le el and do not re1ect the null hypothesis. This means that /('+ holds. <-s0uared is the proportion of ariance that is explained %y the regression model. When we translate this approximation to the /('+ model& then the <-s0uared is an approximate measure of the amount of systematic risk contained in the total ariation. (ccording to the /('+ the non-systematic risk can %e di ersified away. *n our regression analysis results )a4akhmys has higher <-s0uared compared to others& that is 4-1A??@?, then a%out 1B.>>K of all risk in this stock is systematic& meaning non-di ersifia%le. That also means that B1.M?K of the risk shown during 200B-2012 years of returns appears to %e di ersifia%le. (t )a4munaiga4& 11-@1C of all risk in this security is systematic& other BB.3CK of risk is nondi ersifia%le as well as at :haikmunai& 11.AMK of all risk in this stock systematic& lea ing BB.2MK of risk is non-di ersifia%le. !ur%in-Watson test is a test that checks whether there exists serial correlation. @ur !ur%inWatson calculations are7 1-;14B?3(%a&munaiga&), 1-??A>3B(%a&ak'mys), anD 1-;A4@@1(.'aikmunai)- $etGs make hypothesis that7 84 9 E = 4 819 E F 4 *f we choose MK& then !ur%in-Watson ta%le gi es the critical alues corresponding to n T ?0 and one regressor 8%eta9 as d $ T 1.MM& and d- T 1.?2. The !W alue of )a4munaiga4 of 1.A1 and .'aikmunai of 1.AB is greater than d-1.?2& so we do not re1ect the null hypothesis and conclude that there is no positi e or negati e autocorrelation. The !W alue of )a4akhmys of 1.>> is lower than d $ T 1.MM& as a result we re1ect null hypothesis and conclude that there is an e idence of positi e autocorrelation.
2+

Dividend Discount model 6a7ak%$ys +ackground information: ,arnings per share in 2012 T O0.C> !i idends per share in 2012 T O0.23 'ayout ratio in 2012 T 2>.>AK

Estimates: We will first estimate the cost of e0uity for )a4akh+ys& %ased upon a %eta of 0.?A 8which we calculated9& a risk free rate A.>K and a return on market 8FT", 1009 of C.CAK. /ost of e0uity T A.>K ; 0.?A P 2.MAK T C.12K To estimate expected growth in earnings per share o er the fi e-year& we will use information from financial statements 8+orningstar.com97 (sset turno er in 2011 T 33M3;CCC3 T 0.3> Financial $e erage in 2011 T CCC3;?2?M T 1.?0 'rofit +argin 8K9 in 2011 T C30;33M3 T 2A.A>

From these ratios we can calculate <@, <@, T 0.3> P 1.?0 P 2A.A>K T 1M.0CK 5ext step is to calculate retention ratio7 <etention ratio T 1 N O0.23;O0.C> T 0.AMM31C

2,

5ow& from these aria%les we can calculate expected growth rate 8g97 g T AM.M31CK P 1M.0CK T 11.>0K Estimating t%e value: ,xpected !i idend per share7 )a4akh+ys

3ear 1 2 3 > M "um

,'" O1.0M O1.1A O1.30 O1.>M O1.?1

!'" O0.2? O0.2C O0.32 O0.3M O0.3C

'resent 2alue O0.2> O0.2A O0.2C O0.32 O0.3? O1.>B

The present alue is computed using the cost of e0uity of C.12K. To estimate the price 8terminal alue9 at the end of Mth year& we will use constant 8g9. ,xpected ,arnings per share? T O0.C> P 1.11>M P 1.0M T O1.?C ,xpected !i idends per share? T O1.?C P 0.2>>A T O0.>1 Terminal 'rice T O0.>1 ; 80.0CM N 0.0AM9 T OC.CM '2 of Terminal 'rice T OC.CM ; 81.0C129M T O?.>3

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To o%tain the alue per share of )a4akh+ys& we ha e to add present alue of di idends and terminal price. 2alue per share T O1.>B V ?.>3 T OA.C1 6a7$unai<as +ackground information: ,arnings per share in 2011 T O2.MA !i idends per share in 2011 T O0.M> 'ayout ratio in 2011 T 21.01K

Estimates: We will first estimate the cost of e0uity for )a4+unaiDas& %ased upon a %eta of 0.30 8which we calculated9& a risk free rate A.>K and a return on market 8FT", 1009 of C.CAK. /ost of e0uity T A.>K ; 0.3 P 2.MAK T B.1AK To estimate expected growth in earnings per share o er the fi e-year& we will use information from financial statements 8+orningstar.com97 (sset turno er in 2011 T ACA1A0;1M?>101 T 0.M1 Financial $e erage in 2011 T 1M?>101;133AAA0 T 1.1A 'rofit +argin 8K9 in 2011 T 1?0B23;ACA1A0 T 20.1A

From these ratios we can calculate <@, <@, T 0.M1 P 1.1A P 20.1AK T 12.0>K

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5ext step is to calculate retention ratio7 <etention ratio T 1 N O0.M>;2.MAO T 0.ABCBB3 5ow& from these aria%les we can calculate expected growth rate 8g97 g T AB.CBB3K P 12.0>K T C.M1K Estimating t%e value: ,xpected !i idend per share7 )a4+unaiDas 3ear 1 2 3 > M "um ,'" O2.B1 O3.0B O3.3A O3.A0 O>.0M !'" O0.MC O0.?M O0.A1 O0.AB O0.BM 'resent 2alue O0.M> O0.?0 O0.?? O0.A2 O0.AB O3.30

The present alue is computed using the cost of e0uity of B.1AK. To estimate the price 8terminal alue9 at the end of Mth year& we will use constant 8g9. ,xpected ,arnings per share? T O2.MA P 1.0CM1M P 1.0M T O>.2M ,xpected !i idends per share? T O>.2M P 0.2101 T O0.BC Terminal 'rice T O0.BC ; 80.0B1A N 0.0M9 T O2B.0A
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'2 of Terminal 'rice T O2B.0A ; 81.0B1A9M T O1B.CM

To o%tain the alue per share of )a4+unaiDas& we ha e to add present alue of di idends and terminal price. 2alue per share T O3.30 V 1B.CM T O22.2M 8%aikmunai +ackground information: ,arnings per share in 2011 T O0.B? !i idends per share in 2011 T O0.32 'ayout ratio in 2011 T 3A.21K

Estimates: We will first estimate the cost of e0uity for :haikmunai& %ased upon a %eta of 0.?3 8which we calculated9& a risk free rate A.>K and a return on market 8FT", 1009 of C.CAK. /ost of e0uity T A.>K ; 0.?3 P 2.MAK T C.02K To estimate expected growth in earnings per share o er the fi e-year& we will use information from financial statements 8+orningstar.com97 (sset turno er in 2011 T A3A;1?03 T 0.>? Financial $e erage in 2011 T 1?03;?CM T 2.31 'rofit +argin 8K9 in 2011 T 1?2;A3A T 21.CB

From these ratios we can calculate <@, <@, T 0.>? P 2.31 P 21.CBK T 23.3?K

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5ext step is to calculate retention ratio7 <etention ratio T 1 N O0.32;O0.B? T 0.?2AC0A 5ow& from these aria%les we can calculate expected growth rate 8g97 g T ?2.AC0AK P 23.3?K T 1>.?AK Estimating t%e value: ,xpected !i idend per share7 :haikmunai 3ear 1 2 3 > M "um ,'" O0.CC O1.13 O1.30 O1.>C O1.A1 !'" O0.3A O0.>2 O0.>B O0.MM O0.?3 'resent 2alue O0.3> O0.3B O0.>> O0.M0 O0.MB O2.2>

The present alue is computed using the cost of e0uity of C.02K. To estimate the price 8terminal alue9 at the end of Mth year& we will use constant 8g9. ,xpected ,arnings per share? T O0.B? P 1.1>?AM P 1.0M T O1.AC ,xpected !i idends per share? T O1.AC P 0.3A21 T O0.?A Terminal 'rice T O0.?A ; 80.0C02 N 0.0M9 T O1?.?A
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'2 of Terminal 'rice T O1?.?A ; 81.0C029M T O10.B2

To o%tain the alue per share of :haikmunai& we ha e to add present alue of di idends and terminal price. 2alue per share T O2.2> V 10.B2 T O13.0?

"o now our research group can conclude that share alues of all three companies are under alued& %ecause the market prices of companiesG shares are lower than the intrinsic alues. )a4akhmys7 +arket 'rice 8!ecem%er 31& 20129 T O?.0M )a4+unaiDas7 +arket 'rice 8!ecem%er 31& 20129 T O1B :haikmunai7 +arket 'rice 8!ecem%er 31& 20129 T O10.A0 W ). *ntrinsic 2alue T O13.0? W *ntrinsic 2alue T O22.2M W *ntrinsic 2alue T OA.C1

Conclusion and #ecommendation

We examined the /('+ of three )a4akhstani companies in the $ondon "tock ,xchange. (s a result /('+ one factor model performs not so well according to our data research. .ut )a4akhmys showed a little %id good results in comparison with two others )a4munaiga4 and :haikmunai. *n all three companies there is contro ersy %etween intercept and %eta& or more specifically their t-statistics. #owe er in !W test it says that two companies 8)a4munaiga4& :haikmunai9 ha e no autocorrelation which means that there is no relationship %etween
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intercept and %eta& and another company 8)a4akhmys9 has positi e autocorrelation as the alues of one of the aria%les increase& the alues of the second aria%le also increase which fits to the /('+. *f we look at the common stock aluations of three companies& and as we already compared market prices and intrinsic alues of companies& we will recommend to in estors that they need to %uy shares of these companies& since they are under alued& and they can easily sell when share price of particular company will appreciate and get a profit.

References

Dottwald& <. 820129. 08* G)* /H 08* D6V6D*5D D6)#/G50 M/D*( 0/ M*A)GR* )0/#% PR6#* V/(A06(60I- Hournal of interdisciplinary research .essono a @. ". G)* /H #AP60A( A))*0 PR6#65, M/D*( (#APM) H/R *JP*#0*D R*0GR5 H/R*#A)065, Fama& ,.F. U French& ).<. 8200>9. The /apital (sset 'ricing +odel7 theory and e idence. Kournal of *conomic Perspecti$es 1A 839. Farrell& H. 81CBM9. The di idend discount model7 a primer. Hinancial Analysts Kournal ?1 8?9. #illier& !.& <oss&".& Westerfield& <.& Haffe& H. U Hordan& .. 820109. /orporate Finance. -)7+cDraw-#ill Du1arati& !.5. 200>. Lasic *conometrics. 5ew 3ork7 +cDraw #ill .ook /o. "harpe& (lexander and .ailey& 6n$estments& 'rentice-#all& 1CCC& ?th edition www.morningstar.com

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