VALUATION of RAK Ceramics (Bangladesh) Limited

Determination of Indicative Fair Price

The Indicative price of RAK stock has been determined by applying different Valuation methods. We
have adopted Three-Stage Dividend Discount Model (DDM), Comparable Valuations. Each Valuation
technique is given equal weight to derive the Indicative Fair Price of RAK Stock.

Particulars Values (Tk.) Weight Weighted Value(Tk.)

Price Based on Three-Stage DDM 27.39 33.33% 9.13
Price Based on Forward PER of 21.78 33.33% 7.26
DSE
Price Based on Ceramic Sector 36.27 33.33% 12.09
P/BV at DSE
Fair Value of the Stock 28.48

A. Three-Stage Dividend Discount Model (DDM)

We have applied Three-Stage Dividend Discount Model to value the equity in the company with three stages
of growth - an initial period of high growth, a transition period of declining growth and a final period of
stable growth. The rational behind using this model rather infinite period Dividend Discount Model (DDM)
is to adjust the different growth phases of the company. We know, in a competitive free enterprise economy,
it is not reasonable to expect that a company can permanently maintain a growth rate higher than its required
rate of return. As competition will enter this lucrative business, it will force to reduce the company’s profit
margin. Therefore, after a few years of high growth, the company’s growth rate is expected to decline.
Eventually its growth rate is expected to stabilize at a constant level, which is consistent with the assumptions
of the infinite period DDM.

Rationales behind using Three-Stage Dividend Discount Model (DDM) for RAK Ceramics (Bangladesh)
Limited:

1. Currently, the Company is assumed to be in a high growth phase. In order to capture the scopes of
industry growth and to increase its market share, the Company is maintaining its efforts towards
capital investment and innovation, As the Company has some competitive advantage over other
players in the market as well as local manufacturers are also facilitated by imposition of increased
supplementary duty on imported tiles and sanitary wares , it is expected that it will continue its high
growth in sales for next three to four years.

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 2. After three to four years, more local manufacturer are expected to participate in the market to take
the market share of a growing industry which will be attributed by growth potentials of economy
and Real Estate & Housing sector in our country. After four to five years, the growth rate is
expected to decline linearly over the transition period to a stable growth rate.

3. After the transition period, the Company will maintain a stable growth rate. During different growth
phases, its dividend payout ratio will change consistently with the growth rate.

We have to put the different assumptions as inputs

1. Length of each growth phase

2. Growth rate in each growth phase
3. Dividend payout ratios in each growth phase.
4. Costs of Equity in each growth phase

Inputs to the Model

Current Earnings per share(adjusted) = Tk. 1.23

Current Dividends per share(adjusted) = Tk. 0.66

Inputs for Cost of Equity

Accounting Beta of Ceramic Sector Index = 0.78

Risk free rate (10 years T-Bond Rate) = 9.85%
Risk Premium (Premium range for non-listed Company)= 5.00%

Growth Rate during the initial high growth phase

Do we have the historical growth rate? Yes (Yes or No)

If yes, we enter EPS from five years ago(Tk) = 0.33
Do we have an outside estimate of growth? Yes (Yes or No)
If yes, we enter the estimated growth: 28.00%

Do we want to calculate the growth rate from fundamentals? Yes (Yes or No)

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If yes, we enter the following inputs:
Net Income Currently (Mn Tk) = 378.00 Last year
Book Value of Equity (Mn Tk.) = 2,151.00 1,852.00
Tax Rate on Income= 37.50%

The following will be the inputs to the fundamental growth formulation:

ROE(average) = 16.00%
Retention = 50.00%
Do we want to change any of these inputs for the high growth period?
If yes, we specify the values for these inputs

ROE = 16.00%
Retention = 50.00%
Do we want to change any of these inputs for the stable growth period?
If yes, we specify the values for these inputs

ROE = 16.00%

We Specify weights to be assigned to each of these growth rates:

Historical Growth Rate = 20.00%

Outside Prediction of Growth = 40.00%
Fundamental Estimate of Growth = 40.00%

Growth Rate during the transition period

We enter length of the transition period (years) = 5

Do we want the payout ratio to adjust gradually to stable payout? No (Yes or No)
If no, we enter the payout ratio for the transition period = 45%

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Do we want the beta to adjust gradually to stable beta? No (Yes or No)
If no, we enter the beta for the transition period =
0.78

Growth Rate during the stable phase

We enter growth rate in stable growth period= 10.00%

Stable payout ratio from fundamentals is = 37.5%

Do we want to change this payout ratio? Yes (Yes or No)
If yes, we enter the stable payout ratio= 45.00%

Will the beta to change in the stable period? No (Yes or No)

If yes, we enter the beta for stable period = NA

Output from the Model

Initial High Growth Phase

Cost of Equity = 13.75%
Current Earnings per share(Tk.) = 1.23

Growth Rate in Earnings per share - Initial High Growth phase

Growth Rate Weight
Historical Growth = 30.10% 20.00%
Outside Estimates = 28.00% 40.00%
Fundamental Growth = 8.00% 40.00%
Weighted Average 20.42%

Payout Ratio for high growth phase= 50.00%

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The dividends for the high growth phase are shown below (upto 4 years)
Year 1 2 3 4
EPS*(Tk.) 1.34 1.72 2.28 2.75
Dividends 0.69 0.86 1.14 1.35
Present Value 0.61 0.66 0.77 0.81
*LankaBangla Estimates
Transition period (upto 5 years)

Year 5 6 7 8 9
Growth Rate 18.34% 16.25% 14.17% 12.08% 10.00%
Payout Ratio 49.00% 48.00% 47.00% 46.00% 45.00%
EPS(Tk.) 3.06 3.56 4.06 4.55 5.01
Dividends 1.50 1.71 1.91 2.09 2.25
Beta 0.78 0.78 0.78 0.78 0.78
Cost of Equity 13.75% 13.75% 13.75% 13.75% 13.75%
Present Value 0.79 0.79 0.77 0.75 0.71

Stable Growth Phase

Growth Rate in Stable Phase = 10.00%
Payout Ratio in Stable Phase = 45.00%
Cost of Equity in Stable Phase = 13.75%
Price at the end of growth phase(Tk) = 66.11

Present Value of dividends in high growth phase (Tk.)= 2.85

Present Value of dividends in transition phase(Tk.) = 3.80
Present Value of Terminal Price(Tk.) = 20.74
Value of the stock (Tk.) = 27.39

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 B. Relative Valuation Ratios

Determining the value of RAK Stock using Market Price Earning Ratio (PER)

Year 2006 2007 2008 2009E 2010E 2011E

NPAT(Mn Tk.) 177.98 302.57 286.39 310.41 399.33 529.26
EPS(Tk.) 0.77 1.30 1.23 1.34 1.72 2.28
EPS Growth 106% 70% -5% 8% 29% 33%

Particulars
Expected EPS of RAK Ceramics (BD) Ltd. Tk. 1.34
1 year Forward P/E Ratio in DSE 16.25
Value per stock by Using P/E multiples Tk. 21.78

*LankaBangla Estimates

Determining the value of RAK Stock using Price to Book Value Ratio (P/BV) of Ceramic Sector in
Dhaka Stock Exchange

Particulars
Book Value of RAK Ceramics (BD) Ltd. as on 31st Dec 2008 Tk. 9.28
(Adjusted)
P/BV Ratio of Ceramic Sector in DSE 3.91
Value per stock by Using P/BV multiples Tk. 36.27

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 Income Statement of RAK Ceramics (Bangladesh) Limited

Mn Tk.
2006 2007 2008 2009E 2010E 2011E 2012E
Net Sales Revenue 1,955 2,335 3,248 4,157 5,072 6,086 7,304
COGS 1,374 1,530 2,315 2,965 3,617 4,341 5,209
Gross Profit 581 805 933 1,192 1,455 1,746 2,095
Administrative
Expenses 33 59 74 94 123 159 207

Selling & Distribution

Expenses 188 233 342 444 622 730 876
Total Operating
Expenses 222 292 416 539 745 890 1,084
Profit From
Operations 360 513 517 654 710 856 1,011
Other Income 1 7 2 3 4 6 7
Finance Cost 81 85 141 160 75 15 12
Net Profit Before Tax 279 435 378 497 639 847 1,006
Income Tax Income
/ (Expense)
Current Tax 101 132 92 186 240 318 377

Net Profit After Tax 178 303 286 310 399 529 629
No. of 231.95 231.95 231.95 231.95 231.95 231.95 231.95
Shares(Adjusted)
0.77 1.30 1.23 1.34 1.72 2.28 2.71
EPS (Adjusted)

*LankaBangla Estimates