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.
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%
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%
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
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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
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B. Relative Valuation Ratios
Determining the value of RAK Stock using Market Price Earning Ratio (PER)
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
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