Assignment:

For a stock market firm:

Discuss how successful the firm has been at delivering value to its shareholders
over the past 5 years.

Explain how and why the value of equity has changed over the past 12 months.

Undertake a current valuation of the equity in this firm, using the following
methods:
-

Net Asset Value

Price / Earning Ratio (or some other appropriate multiple)
Discounted Cash Flow

Attempt to reconcile any differences in value that you obtain by using these different
methods and state (with reasons) what value you think is correct for the firm.

Note:
For the purpose of my assignment, I have selected the Emirates Bank International of
United Arab Emirates, which is listed on the Dubai Financial Market.

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Table of Contents
Page no.
Emirates Bank International: Valuation Report
Introduction
Limitations of the Report

6
6
6

Executive Summary

Background of the Emirates Bank International

Management of the Emirates Bank International

9
9

Performance of the EBI during the past five years

10

Reasons of EBI's rapid growth during past twelve months

Economic Boom
Government Backing
Freehold Property
Foreign Direct Investment (FDI)
Dis-Investment from neighboring countries
Aggressive Expansion Policy

11
11
11
11
12
12
12

Macro and Micro Analysis

13

Current Valuation of Emirates Bank International

Net Assets Valuation
Advantages of NAV Method
Disadvantages of NAV Method
NAV of the Emirates Bank International
Price Earning Multiple
Advantages of PE ratio Method
Disadvantages of PE ratio Method
PE Ratio Valuation of EBI as on 31.12.2004
Discounted Cash-Flow Method
Free Cash-Flow
Discounting Period
Advantages of DCF Method
Disadvantages of DCF Method
DCF Valuation of the Emirates Bank International
Weighted Average Cost of Capital (WACC)
Period Under Consideration
Investment Expenditure

14
14
14
14
15
15
16
16
16
17
17
17
18
18
18
18
19
19

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Calculation Value

19

Comparison of Various Methods

Reasons of Variations

21
21

Conclusions

21

Bibliography

23

Acronyms

24

Appendices

26

Brief on Emirates International's Main Subsidiaries

Brief on Emirates Bank International's Board Members
Dubai Financial Market's Data and Graphs
"Emirates Bank earnings soar", Gulf News 27.04.2005
PEST Analysis of the Emirates Bank International
Porter's Five Forces Analysis of the Emirates Bank International
SWOT Analysis of the Emirates Bank International

I
II
III
IV
V
VI
VII

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"Emirates Bank International: Valuation Report"

Introduction:
This report is written to fulfill the requirements of the course "Strategic Financial
Management". The report is aimed at assessing the value of Emirates Bank
International (EBI), which is undertaken by various valuation methods. To assess
the profit generating ability of the EBI, Macro and Micro analysis (PEST, SWOT,
and Porter's Five Forces) were necessary. However, there was a limit of 3500
words for the assignment, hence, these analyses are included as appendices,
which form an integral part of this assignment. Similarly, the details of the EBI's
subsidiary companies and its board members are also furnished as appendices
to avoid exceeding the word limit.

Limitations of the Report:

As this is an academic report, there were constraints of time and cost. Detailed
market surveys could not be undertaken. Most of the data is collected through
published sources.
The latest audited accounts of the bank (as on 31-12-2004) have been taken as
the basis of the report. There has been a tremendous increase in the profitability
of the banking industry in general and EBI in particular, during the first quarter of
2005, but the accounts are not audited, so they are not incorporated in the
calculations.

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Executive Summary:
The EBI is a well-reputed local bank, which was established in 1977, and it is
owned upto 77% by the Government of Dubai 1. EBI is listed on the Dubai
Financial Market (DFM) and has been making rapid progress since its
establishment.
The UAE economy is experiencing boom conditions because of the rise in oil
prices. Moreover, the overall environment of UAE is very investment friendly,
which is providing ample opportunities to investors. After the 9/11 incidents, the
repatriation of AGCC investments from USA and Europe have played a major
role in increase of FDI in UAE, while the recent political uncertainties in
neighboring countries like Saudi Arabia, Iran, Iraq etc. have also contributed in
transfer of investment from these countries to UAE. The sale of freehold property
by the Dubai Government has also attracted cash-flow from abroad. All these
factors have given sharp rise to the banking industry and EBI has benefited in
particular, having the backing of Dubai Government.
A detailed macro and micro analysis was undertaken using PEST, Porter's Five
Forces, and SWOT models which all show a very favorable future potential for
the EBI.
The main aim of this report was to assess the value of EBI, which was done by
using three different methods, Net Assets Value (NAV), Price Earning Ratio (PE)
and the Discounted Cash-Flow (DCF). The results are as under:
No.

Valuation Methods

1
2
3

Net Assets Value

Price Earning Ratio
Discounted Cash-Flow

Value in AED ('000)

5,816,448
30,013,692
16,612,816

Different methods have yielded different values because of various reasons. The
NAV method provides the lowest limit because it indicates only the book value of
the tangible assets as at 31-12-2004. It ignores the profit generating ability of the
assets as well as the intangible assets. PE ratio gives the highest value because
it is influenced by the inefficiency of the DFM and the overoptimistic expectation
of the public (both the existing and potential investors). DCF method provides a
moderate value because it takes into consideration the Free Cash-Flow, and not
the accounting profit. So it is not influenced by manipulations of non-cash
expenditure like depreciation.
1

www.emiratesbank.ae
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Under the above mentioned circumstances, the valuation provided by the DCS
method seems to be more reasonable and reliable.
It is to be noted that all the calculations are based on the published accounts for
the year ended 31-12-2004. The accounting results for the first quarter of 2005
are not incorporated because the accounts are not yet audited.

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Background of the EBI:

The EBI was established in the year 1977. It specializes is the field of corporate
banking, besides providing other financial services. Right from its establishment
EBI's aim was to provide world-class service and the bank successfully
developed to achieve this goal. In the year 1998-99 EBI was awarded as "The
Best Bank in the UAE" by Euromoney2.
The head office of the EBI is in Dubai, and it has extensive branch network
throughout the UAE. Apart from UAE, the bank is successfully managing
branches in Saudi Arabia, India, and United Kingdom. EBI holds several other
subsidiary companies, which provide the range of banking and related financial
services. The complete details of these subsidiaries are enclosed as Appendix I.

Management of the EBI:

The top management of a company plays a very vital role in the success and
growth of any organization. The management of the EBI is in very safe hands.
EBI is managed and supervised by a group of very competent and experienced
directors. In order to assess the real value of the EBI, we have analyzed the top
management and directors of the bank. A brief introduction of these directors is
enclosed as Appendix II, for reference.

www.emiratesbank.ae
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Performance of the E.B.I during the past five years:

A business may have various objectives depending upon its mission, but one of
the most important objectives is the maximization of shareholder's wealth. The
business is virtually owned by the shareholders and it has to deliver value to
them. This value is delivered through two main ways, dividends paid and
increase in the price of shares.
During the past five years EBI has shown a remarkable performance. Some key
indicators are briefly described below3:

Share Capital
Cash Dividend
Earning Per Share
Markt. Price/ Share

Year 2000
734.7 M
20 %
1.43
16.07

Year 2001
918.4 M
20 %
1.44
17.85

Year 2002
918.4 M
20 %
1.22
20.00

Year 2003
1148.0 M
20 %
1.33
21.10

Year 2004
1485.0 M
20 %
1.69
50.85

Notes:
- The face value of each share is AED: 2.50
- The increase in share capital is due to bonus issue. One bonus share was
issued for every four shares held.
Some of the recent key indicators are shown with the help of the graphs obtained
from the web-site of DFM (DFM)4, Appendix III.
EBI has been following the policy of uniform dividends @ 20% for the past
several years, however, huge profits have induced the directors to give bonus
shares/ stock dividend. It is normally observed that the market price of shares
decline after a bonus issue but the shares of EBI have shown a steady growth till
2003. In 2004 the shares price has taken a big leap from AED: 21.10 to AED:
50.85. During the first quarter of 2005, the price has gone even higher because
of the soaring profits. EBI's first quarter net profit has increased by 62.39% to
AED: 272.400 Million5, therefore, the market price of shares rose above AED:
60.00 in the month of April 20056.

Audited Financials of EBI as on 31.12.2004.

www.dfm.ae
5
Gulf News: 27.04.2005, and Appendix IV
6
DFM 27.04.2005, and Appendix III
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4

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Reasons for E.B.I's rapid growth during the past twelve months:
The EBI has made a remarkable growth during the past 12 months. The earning
per share has increase tremendously and consequently the market price of the
share has also taken a big leap. During April 2004 the price of the share was
approx. AED: 23.00, while in April 2005 the price has gone to AED: 64.10 7. This
rapid growth can be attributed to several factors, which are briefly analyzed here.
Economic Boom:
The economy of UAE is experiencing robust boost, largely because of the
soaring oil prices in the world market. The oil has gone above US$: 50.00 per
barrel and at times it has crossed even US$: 58.00 per barrel. There is a high
demand for oil because of uncertain and unstable supply of oil from Iraq. So UAE
has been drilling oil at near capacity point. These factors contributed toward a
high level of public revenues and also public expenditures, which benefited the
banking industry in general.
Government Backing:
77% of the EBI is owned by the Government of Dubai. So it enjoys full backing
and support of the Government. The accounts of all the major public sector
corporations are held by the EBI. So the increase in public revenue and
expenditure primarily and particularly benefited this bank. Moreover, the
Government backing has increased the goodwill of the bank, and common public
has shown greater confidence in the EBI. As a result the deposits and advances
of the EBI have grown faster than those of the other banks.
Freehold Property:
The Government of Dubai has started selling freehold properties to expatriates.
These property holders are also given stay permit to the extent of the ownership
of these properties (in some cases upto 99 years). This has proved to be a major
attraction and peoples from allover the world are buying freehold properties in
Dubai. In other words there is a major cash inflow and being the market leader of
the banking industry the EBI has received the lion's share from this inflow.

Khaleej Times: 24.04.2005

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Foreign Direct Investment:

The investment friendly Government policies and the booming economic
conditions have induced foreign investors to invest directly in the country. The
facilities provided by the Dubai Government, like Investment Park, Media City,
Internet City, Palm Island, etc. have attracted huge foreign investment which has
ultimately given growth to the banking industry in general and EBI in particular.
Dis-investment from neighboring countries:
The political problems in Iraq and very recently in Saudi Arabia have prompted
the investors to dis-invest in these countries, and Dubai was naturally selected as
the first choice for investing available funds. So the past twelve months have
seen transfer of investment from countries like Iraq, Saudi Arabia, Iran and etc. to
the UAE. This factor has also given boost to the banking sector.
Aggressive Expansion Policy:
Over the past twelve months, the EBI has followed an aggressive expansion
policies which has proved to be very successful. It has not only introduced new
products and services but also started new subsidiaries like Emirates Islamic
Bank, which have helped to exploit many new segments as well as certain
niches, which were ignored by competitors.
As a result of all the above-mentioned factors, the EBI has achieved new heights
over the past twelve months and the newspapers have called it "Soaring
Results"8 Appendix IV.

Gulf News: 27.04.2005

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Macro and Micro Analysis:

The evaluation of a company is made on the assumption that it is a going
concern and that the trend line of the past performance can be extend to future,
however, the future is very uncertain. The Macro and Micro analyses help us to
reduce the uncertainty of future and predict the value of the company with a
greater degree of accuracy. Hence the detailed macro and micro analyses are
included in this report, which are enclosed as Appendices V, VI, VII, and form
integral part of this report.
PEST Analysis of the Emirates Bank International (Appendix-V).

Porter Five Forces Analysis of the Emirates Bank International (Appendix-VI).

SWOT Analysis of the Emirates Bank International (Appendix-VII).

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Current Valuation of Emirates Bank International:

There are various methods available for the valuation of a company. This report
will use the following three basic methods:
-

Net Assets Valuation Method

Price/ Earning Ratio Multiple
Discounted Cash-Flow Method

Net Assets Valuation Method:

Under this method the company is valued according to the value of its net assets
i.e. value of assets less the liabilities. This method is specially appropriate when
the "going concern concept" is no more applicable. In such circumstances
greater stress is given on the market value or the net-realizable value of the
assets. In other words this method gives the owner's stake in the company. This
method has the following advantages and disadvantages:
Advantages of NAV Method:
-

NAV method is easy to calculate.

The figures are readily available as the balance sheet is published.
The value is objective, because the accounts are prepared under objectivity
concept.

Disadvantages of NAV Method:

-

Fixed assets are stated in the balance sheet under "historical cost concept",
which may differ significantly from the market value.
Valuation of stock is often arbitrary. There are different stock valuation
methods, but the most commonly used is cost or net realizable value, which is
lower. Hence the appreciation in the value of stock is not revealed.
The debtors may include doubtful or even bad-debts.
Intangible assets are difficult to be valued. Firms have intangible assets like
goodwill, patents, intellectuals etc. which are not adequately recorded in the
books. Hence the NAV will be less than the actual value of the company.

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NAV of the Emirates Bank International:

Based on the published accounts of the EBI, the NAV as on 31 st December 2004
may be calculated as under:
AED ('000)
Total Assets
Total Liabilities

38,060,629
32,240,781

NAV

5,819,848

(less) Minority Interest

3,400

Major Shareholders Funds

5,816,448

As per NAV method the value of EBI is AED: 5,816,448

(The balance sheet of 1 st quarter of 2005 has shown a greater value, but the
accounts are not audited. So the last published accounts are used).
Note:
The NAV only provides the lower limit of the value because assets are normally
stated at a value lower then the realizable value. This method does not indicate
the profit raising capability of the assets.
Price Earning Multiple:
This is the most commonly used valuation method based on earnings. This
method uses the accounting profit as the basis of calculation. The formulae used
in this method are as under:
Value of Equity = (PAT -- exceptional items) X P.E. Ratio
P.E. Ratio =

EPS

Market Price Per Share

Earning Per Shares

= .

PAT
.
No. of Ordinary Shares

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Advantages of PE Ratio Method:

-

PE ratio takes into account the profit earning capacity of the business and not
the mere book value.
PE ratio is readily available as it is published daily in the financial press. The
ratio can also be seen at the web-site of DFM.
The PE ratio can be compared against industry benchmark (also available
readily in the press) and hence this method becomes more reliable.

Disadvantages of PE Ratio Method:

-

PE ratios is based on the historical facts.

It relies on accounting profits (not on cash-flow).
Profits are taken from the financial statements, which could be manipulated to
show desired results.
Major role is played by the Market Price and market imperfection can lead to
under/ over valuation.
PE ratio can be used only to compare value of the firms in the same industry,
while different industries are not comparable.

P.E. Ratio Valuation of Emirates Bank International as on 31.12.2004:

AED ('000)
Reported Net Profit
Taxation
PAT

1,033,653
Nil
1,033,653

Adjustment for exceptional items

Gain on disposal of Fixed Assets (36,189)
997,464
Price Earning Ratio =
=

Market Price Per Share

Earning Per Share
AED: 50.85 =
AED: 1.69

30.09

Value of Equity = (PAT - Exceptional items) X P.E. Ratio

AED ('000)

(997,464) X 30.09

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AED ('000)

30,013,692

As per P.E. Ratio method the value of EBI is AED: 30,013,692

Discounted Cash-Flow Method:
NAV and PE ratio rely on the accounting profits and earnings which could be
manipulated by taking different values for depreciation and other non-cash
expenditures.
Discounted Cash-Flow approach, on the other hand, takes into account the
future cash-flow, which can be calculated simply by adding depreciation to after
tax profit. The future cash-flows are then discounted at an appropriate discount
rate, normally the Weighted Average Cost of Capital (WACC).
Free Cash-Flow (FCF):
The cash generated by a company may be required for future capital investment
or at least for replacement of the depreciated capital investment, therefore, it is
important to adjust the cash-flow. The Free Cash-Flow can be calculated as
under:
FCF = PAT + Depreciation -- Investment Expenditure
Discounting Period:
There are two alternative approaches. If the company is to be purchased and
then resold after a particular period, say 5 years, then the present value will be
calculated as under:
1.
2.
3.
4.
5.a
5.b

PV of Free Cash-Flow Year 1

PV of Free Cash-Flow Year 2
PV of Free Cash-Flow Year 3
PV of Free Cash-Flow Year 4
PV of Free Cash-Flow Year 5
PV of Free Cash-Flow Selling Price Year 5

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Advantages of DCF Method:

-

It takes into consideration the stream of benefits generated by assets and not
the static value of assets only.
It allows for future capital investment requirements.
It avoids the effects of manipulation in accounting profits.

Disadvantages of DCF Method:

-

The future cash-flow is estimated based on the information released by the

organization. Sometimes the management does not release complete
information.
The market imperfection may lead to incorrect cost of equity, specially if
Capital Asset Pricing Model (CAPM) is used.
The element of uncertainly can not be eliminated from the future FCF.

DCF Valuation of the Emirates Bank International:

Weighted Average Cost of Capital:
For the valuation of EBI the first step is to determine the WACC. CAPM can not
be used to find the cost of equity because of non-availability of Beta. Although
EBI's shares are quoted on DFM, however, DFM is still in its infancy and reliable
figures for Beta is not available. Hence the minimum expectations of the
shareholders is taken as the cost of capital. The minimum expectation is a
dividend of 20%. For the purpose of calculation of capital employed, share capital
and medium term borrowing (Euro Bonds, average duration 5 years) are taken.
There are no longer borrowing of the bank. The details are as under:
Type of Capital

AED ('000)

Cost %

Shares Capital
Loan (Bonds)

1,435,014
5,564,595

20%
4%

Weightage Weighted Cost

0.205
0.795

4.10%
3.18%

6,999,609
Weighted Average Cost of Capital (WACC)

7.28 %

(WACC is rounded to 7% for convenience of working)

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Period Under Consideration:

Keeping in view the present conditions of economic boom in the country, it is
assumed that the EBI's profits will grow at an average rate of 5% per annum for
the next 5 years and after that profits will stabilize. So in fact it will become a
perpetuity after 5 years.
Investment Expenditure:
For the purpose of Capital Expenditure only the increase in Fixed Assets is
considered which is readily available in the published financial reports. A careful
study of the past 5 years shows that this increase is more or less equal to the
depreciation, hence the Capital Expenditure is taken to be equal to depreciation
for the future years also.
Calculation Value:

Net Profit
AED (' 000)
Discount Factor
(7%)
Present Value

Year 2005

Year 2006

Year 2007

Year 2008

Year 2009

Beyond

1,033,653

1,085,336

1,139,603

1,196,583

1,256,412

1,256,412

0.9346

0.8734

0.8163

0.7629

0.7129

--

966,052

947,932

930,258

912,873

895,696

--

Value of Perpetuity

17,948,743

Present Value
Perpetuity

11,960,005

Note:

of

Since

(Depreciation
(Free Cash Flow

=
=

Capital Expenditure)
Net Profit)

Because

(FCF = Net Profit + Depreciation -- Capital Expenditure)

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AED ('000)
(Total Present Value
of the Company)

966,052
947,932
930,258
912,873
895,696
11,960,005
16,612,816

As per DCF method the value of EBI is AED: 16,612,816

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Comparison of Various Methods:

Various methods of valuation give various values of Emirates Bank International.
A summary is given below for quick reference.

Methods

Value in AED: ('000)

Net Assets Value

Price Earning Ratio
Discounted Cash-Flow

5,819,848
30,013,692
16,612,816

Reasons for Variations:

The variation among the different values in very significant, and there are several
reasons for it. Some of the main reasons are discussed below:

The NAV method shows the minimum level of valuation and only reflects the
net value of existing assets. It does not take into consideration the revenue/
profit generation capacity of the business.
Intangible assets (like brand name, goodwill, etc.) are not recorded although
they have a significant value.
The PE ratio heavily depends on the market price. There are imperfections in
the DFM. At most, it can be taken as semi-efficient. Therefore, the valuation is
influenced by the overoptimistic expectations of the market.
The cost of equity is based on the minimum expectations of the shareholders
to find out WACC, whereas the actual return is higher.
The growth rate of 5% is very modest keeping in view the growth of about
40% in the first quarter of 20059.

Conclusions:
The EBI is an established company which is listed on the DFM. It has shown
remarkable growth during the last five years and there is great potential for the
near future.
The valuation of the company is undertaken using three different methods,
namely NAV, PE Ratio, and DCF. All the methods provided different values but
the figure provided by the DCF method is more reasonable and reliable because
9

Appendix IV
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of the distinct advantaged of this method. Therefore, the true value of the EBI is
taken at AED: 16,612,816,000/- (US$: 4,522,955,622.11), at the conversion rate
of US$ 1 = AED: 3.673

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Bibliography

Books

Richard Pike and Bill Neale, "Corporate Finance and Investment: Decisions and
Strategies", 4th edition, Prentice Hall, McGraw-Hill, Europe, 2003. (Core book for
SFM module).
Dr. Patrick Barber and Bill Neale, "Study Book", 3 rd edition, Bradford University,
UK, 2003. (Core book for SFM module).
Gary E. Jones and Dirk Van Dyke, "The Business of Business Valuations", 1 st edition,
McGraw Hill Publications, 1998.

Tutorials

Dr. Patrick Barber and Dr. Iain Ward Campbell, Professors/ Lecturers for the Strategic
Financial Management Module, University of Bradford, UK. SFM Notes and worked
examples 2005, Dubai.
Mr. Shawn Akhtar, local tutor for the SFM module, Dubai, UAE.

Internet Sites
http://www.emiratesbank.ae
http://www.emiratesislamicbank.ae
http://www.eiu.com
http://www.economist.com
http://www.gitex.com
http://www.dfm.ae
http://www.investopedia.com

(EBI's main web site + several other group sites)

(Emirates Islamic Bank's web site)
(Economist Country Report / UAE March 2004)
(Economist main web site)
(Gitex 2004 Dubai, UAE)
(Dubai Financial Market's main web site)
(Investopedia's main web site)

Magazines & Newspapers

Khaleej Times, UAE Newspaper.

Gulf News, UAE Newspaper.

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Acronyms Used
AED

Arab Emirates Dirham (UAE currency unit)

AGCC

Arab Gulf Cooperative Council (Gulf countries of Bahrain,

Kuwait, Oman, Qatar, Saudi Arabia and UAE).

CAPM

Capital Asset Pricing Model

DCF

Discounted Cash Flow

DC-UAE

Diners Club - United Arab Emirates

DFM

Dubai Financial Market

FCF

Free Cash Flow

EBG

Emirates Bank Group (EBI plus subsidiaries)

EBI

Emirates Bank International

EFS

Emirates Financial Services

EPS

Earning Per Share

Euromoney

Europe's leading magazine of Banking, Finance and Capital

Market

GTC

Global Training Center

KSA

Kingdom of Saudi Arabia

MEB

Middle East Bank

NAV

Net Asset Value

NI

Network International

NGI

National General Insurance

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PAT

Profit After Tax

P. E. Ratio

Price Earning Ratio

PV

Present Value

UP

Union Properties

US$

United States Dollar (USA currency unit)

UAE

United Arab Emirates

WACC :

Weighted Average Cost of Capital

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Appendices

Appendix I :

Brief on Emirates Bank International's Main Subsidiaries

Appendix II :

Brief on Emirates Bank International's Board Members

Appendix III :

Dubai Financial Market's Data and Graphs

Appendix IV :

"Emirates Bank earnings soar", Gulf News 27.04.2005

Appendix V :

PEST Analysis of the Emirates Bank International

Appendix VI :

Porter's Five Forces Analysis of the Emirates Bank International

Appendix VII:

SWOT Analysis of the Emirates Bank International

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