A Report on the equity

valuation of Reckitt
Benckiser Bangladesh
Ltd (RBBL)

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A Report on the equity valuation of
Reckitt Benckiser Bangladesh Ltd
(RBBL)

Prepared for
Khairul Alam Siddique
Lecturer
Department of Finance
University of Dhaka

Prepared By
Md. Sabbir Hossain

Id no: 23-068

Section- A

BBA-23rd

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 Letter of transmittal

February 12, 2020

Khairul Alam Siddique

Lecturer

Department of Finance,

University of Dhaka

Subject: Submission of Term Paper “A Report on the equity valuation of Reckitt

Benckiser Bangladesh Ltd (RBBL)”

Dear Sir,

Here is the report on the equity valuation of Reckitt Benckiser Bangladesh Ltd (RBBL), as
per my requirement for course F-307; Analysis of Investments. It has been extremely
challenging and interesting for me. I am confident that this knowledge will prove to be of
utmost value and importance to me in the future.

I have put my sincere effort to make this report a presentable shape and make it as informative
and precise as possible. I hope that any unintentional error, omission or mistake committed
by me while preparing this report will be considered with sympathy.

Sincerely yours

Md. Sabbir Hossain

ID No: 23-068

23rd Batch, Section: A

Department of Finance,

University of Dhaka

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 Table of Content

Executive summary ....................................................................................................................................... v

Introduction .................................................................................................................................................. 6
Company overview and background ............................................................................................................ 6
Global Analysis .............................................................................................................................................. 7
Macroeconomic Analysis .............................................................................................................................. 8
Industry analysis ........................................................................................................................................... 9
Porter five forces of Toilet-cleaning and Soap industry ........................................................... 11
Industry life Stage of the industries .......................................................................................... 12
Company analysis........................................................................................................................................ 13
BCG Matrix of the companies business portfolio..................................................................... 14
Analysis of the company's past income statement performance.............................................................. 15
Pro-forma income statement for valuation ................................................................................................ 17
Assumptions for preparation of Pro-forma Income statement .................................................. 17
Pro-forma balance sheet............................................................................................................................. 19
Weighted Average cost of capital (WACC) of RBBL .................................................................................... 21
Calculation of estimated Changes in net working capital ........................................................................... 22
Valuation of RB Bangladesh limited (Free cash flow model) ...................................................................... 22
Valuation of RB Bangladesh limited (DDM Valuation model) .................................................................... 23
Relative valuation model ............................................................................................................................ 24
The growth duration of RBBL .................................................................................................. 28
Conclusion ................................................................................................................................................... 29
Appendix ..................................................................................................................................................... 30
References .................................................................................................................................................. 37

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 Executive summary

Based on certain assumptions made and stated in the report the Pro-forma income statement and
Pro-forma balance sheet of the selected company, Reckitt Benckiser Bangladesh Ltd (RBBL),
have been constructed. The WACC of the company has been constructed using the CAPM method.
But due to consistent negative returns generated by the market, the WACC has been found to be
lower than the risk-free rate. So risk-free rate + standard deviation of RBBL return has been
determined and has been used as the discount rate for valuation. The value per share of 2912.54
BDT using the free cash flow method (FCFM) has been calculated by discounting the calculated
free cash flow to the firm of the next 5 years and the terminal free cash flow of the firm. The value
per share of 2606.18 BDT using the Dividend Discount Model (DDM) by discounting the expected
dividend of the next 5 years and the terminal value of the expected dividend. Finally, using the
relative valuation model, the value per share has been calculated. 4 different types of multiples
have been used and GlaxoSmithKline Bangladesh Limited(GSK) has been used as the counterpart
company. The FCFM and DDM and 2 multiple of Relative valuation suggest, the current share
price of the company is overvalued and should be sold by the shareholders.

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Introduction
The report includes the valuation of Reckitt Benckiser Bangladesh Ltd which is a subsidiary of
Reckitt Benckiser Group a UK based company with an asset value of nearly 46.23 billion US
dollars. In the process of conducting the valuation of the company, the global analysis of major
indicators affecting the business of the company has been done. Then the Macroeconomic
indicators affecting the business is further been analysis. The forecast of future macroeconomic
performance has also been estimated. Then the industry analysis and forecast has been made.
Based on the macroeconomic, industry, future management policy and past performance, the
required assumptions for the valuation of the company’s share has been set. Using the Free cash
flow model, the discounted dividend model, and the relative valuation model, the per-share value
of the company has been calculated.

Company overview and background

Reckitt Benckiser Bangladesh Limited is one of the top 5 highly-priced listed companies of the
Dhaka Stock Exchange. The company first started operating in the name of the 5th of April, 1961
with the name of Robinson s Foods (East Pakistan) Limited which changed into Robinson s Foods
(Bangladesh) Limited. Finally, after merger with Benckiser, the company became Reckitt
Benckiser Bangladesh Limited. The company operates in the Household toiletries and
pharmaceutical industry with its many prominent branded products. 82.96% of the share is held
by its parent companies, Reckitt Benckiser Plc., UK. 3.77% of the share is held by the Government.
The rest 3.41%, 3.03% and 6.83% of the shares are held by institutional investors, foreign investors
and General investors respectively. The product portfolio of the company is given below:

Source: Amazon.com
➢ Dettol soaps, liquids, and creams
➢ Harpic and Vanish toilet cleaner,
➢ Lizol liquid floor cleaner,
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 ➢ Veet cream
➢ Moov cream,
➢ Trix dishwashing liquid.
Besides, the company had Mortein mosquito repellent and Disprine tablets. But it has discontinued
the production of the two products.

Global Analysis
From a global perspective, the growth of demand for toilet care goods has been really favorable
for a couple of years. The growth rate is expected to be continued. The major players in the global
market are

• Unilever
• Proctor & Gamble
• Church and Dwight INC
• Henkel
These players are expected to continue to dominate the global toilet care market along with RB
Group Inc. The current international market size is 1.28 billion Dollar and the estimated average
growth rate of the global market is nearly 3.52% where North America is the largest market but
the Asia Pacific region has been the fastest-growing market (Mordor, 2019). 50% of the growth is
expected to come from the Asian Pacific Region due to the growth of Commercial end-user in this
region. According to Mordor research, the international market of this sector is fragmented, as
many players are dominating the market. The Average Growth rate of the Asian region market is
expected to be 4% in the upcoming years due to the following reasons:

• Adaptation of a safer and healthier lifestyle due to increased concern of people about their
health and sanitation
• The emergence of different diseases: The rise in health consciousness among consumers
regarding the prevalence of harmful diseases such as diarrhea have led to the rise in the
sales of toilet care products around the world particularly more among the developing
nation with increasing level of awareness to keep the surroundings clean
• Increased outbreak of harmful germs: recently the outbreak of ncov 2019 coronavirus in
China has increased the demand for Soaps and health care products not only in China but
also in the world
• Increased Upliftment of Poverty: Here GDP per capita can be used as a proxy variable to
measure the poverty rate. In 2018, the world had a GDP per capita of $11,312.452 US
dollar. The growth rate of per capita is estimated to be 3.2% to 3.8 % according to world
bank forecast where Southeast Asia is estimated to have a per capita GDP growth rate of
around 4% from 2020 to 2023.
• Favorable Economic Indicators

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 Table name: Forecast Economics performance of Southeast Asia by IMF

Economic indicators Year

2020 2021 2022 2023 2024
GDP growth rate 5 5.1 5.1 5.2 5.2
GDP per capita (US dollar) 5011.738 5310.737 5632.018 5977.536 6342.355
Private consumption 6.9 6.6 6.8 6.7 6.9
(growth rate)
Public consumption (growth 7.6 7.5 7.8 7.4 7.6
rate)
Inflation rate (Average % 2.7 2.8 2.8 2.8 2.9
change of consumer price)
Population (Million) 662.416 669.257 676.118 682.991 689.862
Source: IMF 2020

The above favorable economic forecasts (low estimated inflation, stable growth rate of
GDP, high growth rate of private consumption) indicate the favorable business condition
for the world economy.
The above global analysis indicates the favorable business condition for the world and south-east
Asia.

Macroeconomic Analysis
In recent years, Economy of Bangladesh is growing at a stable rate of nearly 7% to 8% (World
Bank, 2020). Major macro indicators provide the pictures.
Table name: Performance of major macro-economic indicators of Bangladesh

Economic indicators 2014 2015 2016 2017 2018

GDP growth (annual %) 6.06 6.55 7.11 7.28 7.86
GNI per capita growth (annual %) 3.55 5.18 5.25 4.75 6.99
Private consumption growth rate 12% 13% 10% 13% 18%
Inflation, consumer prices (annual %) 6.99 6.19 5.51 5.70 5.54
Population growth (annual %) 1.14 1.12 1.09 1.07 1.05
People using at least basic sanitation services (% of 44.46 45.74 47.01 48.23 50.24
population)
People using at least basic sanitation services, rural (% 40.13 41.86 43.61 45.39 46.86
of rural population)
Source: World Bank
The above are all past economic conditions that the sector will follow for its business. Bangladesh's
economy has performed fairly well in all those economic performances. The rise of population,
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private consumption growth rate, usage of sanitation services by both rural and the population
overall showed a high demand for toiletries, soap and health care products sold by the company.
The forecasted economic performance in those economic indicators are given below:
Table name: Forecast of major macroeconomic indicators affecting the company

Economic indicators 2020 2021 2022 2023 2024

GDP growth (annual %) 7.4 7.3 7.3 7.3 7.3
GNI per capita growth (annual %) 8.49 8.32 8.33 8.32 8.32
Private consumption growth rate 18 19 16 19 20
Inflation, consumer prices (annual %) 5.5 5.5 5.5 5.5 5.5
Population growth (annual %) 1.04 1.04 1.04 1.04 1.04
People using at least basic sanitation services (% of 55.12 58.43 60.29 62.35 65.45
population)
People using at least basic sanitation services, rural 51.27 53.37 55.42 58.23 60.17
(% of rural population)
Source: World Bank, ADB, OCID, IMF
The above forecast of major economic indicators favorable for the business of RB Bangladesh. As
stable population growth, rising private consumption growth rate, rising sanitation service used by
the people of Bangladesh shows rising demand for toilet cleaning products, soaps, and health care
products. Based on the above forecast, it can be said that the future prospect of doing business in
Bangladesh is good. The following steps, by the Government of Bangladesh, also indicate the same
things.

• The current operation of 88 economic Zones, of which 29 Privately owned, 8 Export

processing zones (EPZ).
• Construction of 100 new EPZS and special economic zones
• Tax holiday for companies in certain sectors that include sanitary and pharmaceutical
sector as well
• Tax exemption of income and capital gain from certain investment
• Exemption on interest paid on foreign loan
• Exemption of customs duty on import of capital machinery

Industry analysis
The Dhaka stock exchange has classified Reckitt Benckiser Bangladesh Ltd is in the
pharmaceutical and chemical sector of the country. But the company does not sell chemical
products. The main market, that RB Bangladesh belongs to, is household & toiletries industries,
as maximum revenue comes from this market. Besides the company is the condom market as well.

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Toilet cleaning market:
Few brands control the major market share of this market. Major players in this market are given
below:

In this market, RB holds major, 85%, market shares in this market. Kohinoor Chemical Company
Ltd.’s clean master, ACI Consumer Brands’ Vanish, square Toiletries’ Shakti are the rest of the
market shareholders in this market. Recently launched Swift by Pran-RFL Group may take some
market shares. But this will hardly affect the revenue of RB Bangladesh due to its high brand value.
The urban market is almost matured with a penetration level of 95%. Due to the increasing number
of nuclear families, shared toilets’ number is escalating in major cities. The market is expected to
see growth in the sale from this segment. The industry is still at the growing stage. Porter 5 force
of this market is given below:
Soap market
Bangladesh soap market can also be divided into 2 parts Bathing Soap and Laundry Soap. The
bathing soap can be divided into further 2 segments -Beauty soaps, which makes up 80% of the
bathing soap market, and health soap with 20% of the bathing soap market. Unilever Bangladesh
Ltd is the major player in this market with 50% of the market share of bathing soap and 65% of
laundry soap with Rin Power White and Surf excel. The current soap demand of Bangladesh is
around 90000 megatons according to the industry experts. Major market players are given below:

Source: Bangladesh Brand Forum

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Porter five forces of Toilet-cleaning and Soap industry

Source: Author
The threat of new entrants: it is favorable due to the huge size of the existing market leader but
the market has no entrance barrier. Besides, non-brand goods are also sometimes sold at the
existing brand’s name.
The threat of substitutes: it is unfavorable due to low brand consciousness among rural people
and high price differences of similar products.
Bargaining power of buyers: The bargaining power of buyers in this market is high due to the
prevalence of many suppliers with identical products.
Bargaining power of suppliers: The bargaining power of suppliers in this market is low due to
difficulty in convincing customers to buy identical products with a high price difference.
Rivalry among existing players: Due to large size and brand name, some companies are
dominating the market. It requires great effort to take market share from the players of the Toilet
cleaning market, though the soap market is growing.

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Condom market
The condom market is growing at a rate of nearly 10% rate. The market is a fragmented one with
nearly 12 brands in the market, led by U&ME. Due to the high cost and price, RB holds a very
small market segment. U&ME brands led the market with its cost differentiation strategy.

Source: Bangladesh Brand Forum

Industry life Stage of the industries

The industry life stage of these industries are given below:

Industry name Segments of Life cycle stage Supporting evidence

that industry
Toilet cleaning Rural Growing People using at least basic sanitation services
used by rural people is only 48.86% in 2019

Urban Matured market The urban market is with a penetration level

of 95%.
Soap market Beauty soap WB report shows only 28 percent of toilets
Laundry soap are equipped with soap and water. 29% of the
users actually use soaps to wash their hands
after the toilet.
Condom market Growing As according to expert the market is expected
to grow at 10% every year
Source: Author
Industry forecasts

Industry name Growth rate forecast

Toilet cleaning 6%
Soap market 8%
Condom market 10%
Source: Author

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Company analysis
Segments of the company
RB Bangladesh LTD has two operating segments – household and toiletries division and
pharmaceutical division. These two are managed distinctively as both require their distinctive
market expertise and technologies. The Household and toiletries segment constitutes 92% of the
business revenue and growth and the other constitutes 8% of the business.

Besides the company has not used its full capacity. The capacity utilization is given below:

Comments on future operation exposure: Previously, the company focused on increasing the
pharmaceutical segment due to its high growth but after the discontinuation of the manufacturing
unit of Disprin, it is expected that the company will further de-escalate its exposure in the
pharmaceutical sector. The companies major revenue-generating brands are Harpic, Durex, Dettol,
Moov, etc.
Competitive advantage

• Major competitive advantage is the industry knowledge and experience of the veteran
management team of the company with 20 years of industry experience of the chairman,
Rahul Mathur. Besides, Pradeep Krishnamurthi, a director of the company, has vast
experience and success in supply chain and project management

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BCG Matrix of the companies business portfolio

Source:Author

Star: Dettol Antiseptics and liquid has nearly 9% to 10%% market share and the market is growing
in rural areas as more people are coming under sanitation services
Question marks: Due to its high price compared to the competitors, Durex condom enjoys a low
market, though the condom market, according to an industry expert, is growing at a rate of nearly
10%.
Cash Cow: The company’s most popular and highest revenue earning product Harpic is the market
leader with 85% market share. There is a little area in the urban for the market to grow. In spite of
having a low contribution to the overall revenue of the company, Moov cream enjoys a very high
market share.
Dog: due to popular deleterious for health but effective mosquito repellent, the company has lost
its market leader position and has decided to discontinue its selling. Besides, due to the low demand
for Disprine tablets, the company has discontinued its production in Bangladesh.
Besides, there is Lizol liquid floor cleaner, Veet hair removal cream, and Trix dishwashing liquid
which are new in the market and there market share is now relatively low.

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Forecasted market poisoning of the company emphasis on the escalation of sales growth of Harpic
on the rural sector.

• The expectation of the market about the Dettol soap to be the driver of the growth in
upcoming years
• Initiation of the company’s own Dettol soap manufacturing facilities which will result in a
lower cost of production from 2018.
• Discontinuation of mosquito repellent brand due to low market share.
• The growth rate of revenue from Durex as the market is expected to grow at a rate of 10%
annually.
• Discontinuation of Disprine’s operation

Analysis of the company's past income statement performance

Table name: RBBL’s last 4 years performance
Items 2015 2016 2017 2018
Revenue growth rate ( Household and toiletries) 8.03% 13.77% 9.07% 4.76%

Reveneue growth rate ( Pharmaceuticals) 8.03% 48.47% 30.54% 24.18%

House hold and toiletres reveneue proportion ( % 95.51% 94.22% 93.16% 91.99%
of total reveneue)
Pharmaceutical sector reveneue roportion ( % of 4.49% 5.78% 6.84% 8.01%
total reveneue)
Total Sales growth rate 8.03% 15.33% 10.31% 6.09%
COGS in proportion to sales 48.12% 46.54% 46.73% 45.10%
EBITDA Margin 15.5% 15.1% 16.1% 15.3%
EBIT Margin 14.0% 13.8% 14.0% 13.5%
Profit after Tax margin 9.6% 8.9% 10.4% 8.5%
Operating expense/Revenue 37.5% 39.0% 37.8% 41.0%
Return on Equity 135.1% 125.3% 125.4% 86.0%
Return on Asset 27.5% 24.3% 25.6% 19.8%
Dividend payout ratio 111% 124% 98% 100%
Effective tax rate ( % of PBT) 31.09% 35.40% 29.81% 36.88%
Source: Author
Comments:
In the past 5 years, the company generated most of its revenue from the Household and toiletries
segment, though the growth rate of that sector was lower than the other. On the other hand, the
pharmaceutical sector experienced a higher growth rate.

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The proportion of revenue held by the pharmaceutical sectors was escalating due to higher growth.
On the other hand, the contribution of the household sector to the revenue sector decreased. The
company’s cost of goods sold decreased due to the initiation of the manufacturing unit for the
production of Dettol.
The company’s earnings before the tax margin initially declined but recovered quickly with a
decreased cost of goods sold. The company’s EBITDA, ROA, ROA experienced declined from
2015 to 2018.
RB Bangladesh is one of the highest dividends paid, though the company’s Dividend payout ratio
consistently decreased in the 4 years.
Analysis of balance sheet
Table name: RBBL’s last 4 years balance sheet performance analysis
Particulars 2015 2016 2017 2018
Net capital Expenditure (proportion to 1.03% 3.80% 3.34% 3.77%
sales)
Inventory in proportion to sales 9.8% 8.9% 7.5% 7.7%
Accounts receivable in proportion to sales 0.24% 0.48% 3.52% 2.17%
Accounts payable in proportion to sales 2.45% 5.64% 6.06% 4.16%
Days Sales Outstanding (DSO) 1.3 1.6 12.1 7.0
Days of Inventory Outstanding (DIO) 67.31 63.56 58.38 58.94
Cash Conversion Cycle (86.7) (154.7) (153.4) (168.4)
Cash & Cash Equivalents (BDT Mn) 435 769 714 949
Source: Author
Comments :
Last 4 years, the company made a stable capital expenditure with the purpose of escalating
revenue. the company made a significant investment in setting up the manufacturing unit for the
production of Dettol, which was used to purchase by the company. Besides, the company did fairly
well in managing its inventory by decreasing its DIO. The company does not have any interest-
bearing debt due to its highly efficient cash management capability which can be seen in its
improvement of the cash conversion cycle. Though, the company has to improve its DOS, as it is
requiring more time for the company to collect cash from the sale. So it has to improve in this area.

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Pro-forma income statement for valuation

Assumptions for preparation of Pro-forma Income statement

Revenue

Items 2019 2020 2021 2022 2023

Reveneue growth rate from House hold 12.00% 10.50% 10.50% 10.50% 10.50%
and toiletres
Reveneue growth rate from -3.10% 3.00% 8.01% 7.06% 7.06%
Pharmaceuticals
Total Reveneue growth rate 12.48% 10.29% 10.44% 10.41% 10.41%
Source: Author
Reasons:

• Due to the initiation of manufacturing unit for Dettol, the growth rate of price by nearly
10% with the market growth rate of 6%, the growth rate of revenue from H&T segment is
assumed to be 12% in 2019 and 10.5% in the next 4 years
• Due to the high revenue growth rate from the pharmaceutical sector, it is assumed that from
2020, the company will increase its exposure in this sector.
• In 2019, the growth rate is assumed to be negative due to the discontinuation of
manufacturing of Disprine tablets.
Cost of goods sold (COGS)

Item 2019 2020 2021 2022 2023

COGS ( Proportion to sales ) 43% 42% 42% 42% 42%
Source: Author
Reasons:
As, The company has started producing its one of the most profitable products, Dettol, in its own
manufacturing unit from 2018. COGs are expected to decrease in the upcoming years.
Operating expenses (Opex) proportion to sales

Item 2019 2020 2021 2022 2023

Opex ( Proportion to sales ) 42% 42% 42% 42% 42%
Source: Author
Reasons: Opex is assumed to be stable at 42% which was 41.40% in 2018. Though the rate
increased each year, the company will be able to stabilize the cost with its expert management

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Profit from sale of PPE ( % of the sale of the PPE)

Item 2019 2020 2021 2022 2023

Profit from sale of asset 96.87% 96.87% 96.87% 96.87% 96.87%
Impairment loss reversal 573,000
Source: Author
Reasons: as the company on average made 96.87% profit on the sale of PPE, it is assumed to
remain the same in the coming years. In the company’s September statement, it is seen that there
was an impairment loss reversal of 573000. We assumed there will be no further loss reversal.
Finance income

Item 2019 2020 2021 2022 2023

Finance income Growth rate 5.02% 5.02% 5.02% 5.02% 5.02%
Source: Author
Reason: as on an average the company had a 5.02% growth rate of Finance income. It is assumed
to remain the same for the next 5 years.
Allocation for WPPF
The company has a policy of allocating 5% of profit before the allocation. It is assumed to remain
the same for the next 5 years.
Effective tax rate

Item 2019 2020 2021 2022 2023

Effective tax rate (% of PBT) 34.49% 34.49% 34.49% 34.49% 34.49%
Source: Author
Reason: the company on average paid 34.49% effective tax in the last 5 years. It is assumed to
remain the same for the next 5 years.
Other comprehensive income
The average 18.19% of Profit before other comprehensive income is assumed to remain the same
for the coming years.
Dividend policy

Item 2019 2020 2021 2022 2023

Dividend payout ratio 108% 100% 92% 84% 76%
Source: Author

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Reasons: on average the company’s Dividend payout ratio decreased by 8% the previous year. So
an 8% decrease from the previous year’s (DPR) is assumed to remain the same for the coming 5
years.
The calculated Pro-forma income statement is given below:

Source: Author

Pro-forma balance sheet

Assumptions
Table name: assumptions for calculation of Pro-forma Balance Sheet

Particulars 2019 2020 2021 2022 2023

Net capital Expenditure ( proportion to sales) 3.35% 3.35% 3.35% 3.35% 3.35%
Calculated Remaining useful life of PPE 4.80 3.80 2.80 1.80 0.80
Growth rate of other fixed asset 3.47% 3.47% 3.47% 3.47% 3.47%
Accounts receivable in proportion to sales 1.32% 1.32% 1.32% 1.32% 1.32%
Advance & prepayment in proportion to sales 1.59% 1.59% 1.59% 1.59% 1.59%
Growth rate of other receivables 20.86% 20.86% 20.86% 20.86% 20.86%
Accounts payable in proportion to sales 4.37% 4.37% 4.37% 4.37% 4.37%
Total employee benefits • gratuity growth rate 8.31% 8.31% 8.31% 8.31% 8.31%
Employee benefits • gratuity non-current ( % 97.77% 97.77% 97.77% 97.77% 97.77%
of total)
other payables in proportion to sales 23.44% 23.44% 23.44% 23.44% 23.44%
current tax liabilities in proportion to sales 2.76% 2.76% 2.76% 2.76% 2.76%
Interest bearing loans 0 0 0 0 0
Source: Author

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Reason: all above-assumed figures are estimated to remain the same which are equal to their
respective last 5 years’ average. The company does not have any interest-bearing loan both short
and long term and it is assumed to remain the same for the coming 5 years.
The constructed Pro-forma balance sheet is given below:

Source: Author

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Weighted Average cost of capital (WACC) of RBBL
Assumptions:
➢ Risk-free rate = 15 yearly MONTHly average 5-year bond yield with 159 observation
➢ there is interest-bearing no long term debt financing by the firm

Source: Author
Yearly DSEX market return is negative. The calculated WACC using the CAPM model is given
below

Source: Author
Due to the market return being negative WACC using CAPM will be below the Risk-free rate of
return which does not make sense. The used discount rate is calculated by adding Risk-free return
with Standard deviation of return of RB Bangladesh LTD that is 19.75% which is used in Valuation
calculation of the company by assuming that the expected rate of return is equal to risk-free return
+ standard deviation of return (risk).

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Calculation of estimated Changes in net working capital
The estimated net working capital for the coming 5 years is given below:

Source: Author
The above positive signs of changes in Net-working capital indicate a decrease in the investment
of working capital and the negative signs of changes in Net working capital indicates a further
investment of working capital. Except for 2019, it is estimated and calculated that the company
has to make the investment of Net-working capital every year.

Valuation of RB Bangladesh limited (Free cash flow model)

The assumptions:
➢ The terminal growth rate of free cash flow is assumed to be 8% after 5 years.
➢ No interest-bearing loan
➢ The used discount rate is 19.75%
The calculation is given below:

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Figure name: valuation of RBBL share using Free cash flow model

Source: Author
Comments: the calculated value per share on December 31, 2019, is 2848.30 BDT. But, today it
is 11 February 2020. Using the Future value concept, the value on 11 February 2020 can be
calculated.
Value( per share) of RBBL at 11 February 2020 = 2848.30*(1+(.1975/12)^(1+11/30)
= 2912.54 BDT
As the current market price is 3,068 BDT (per share) which is higher than the fundamental value
(per share) of 2912.54 BDT. The stock should not be purchased, as overvalued, rather should be
sold.

Valuation of RB Bangladesh limited (DDM Valuation model)

Table name: Assumption of the growth rate of Dividend per share of RBBL in coming years

Years The assumed Growth rate of Dividend per

share
From 2019 to 2021 30%
From 2022 to 2024 20%
From 2023 to 2028 15%
Terminal 13%
Source: Author

• The 19.75% discount rate has been used for discounting.

• The terminal growth rate means the company’s dividend will increase at a rate of 13% after
2028 to infinity.

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The calculated value per share of RB Bangladesh Limited using Discounted Dividend model is
given below:
Figure name: valuation of RBBL’s share using Discounted Dividend Model

Source: Author
Comment: the calculated value per share on December 31, 2019, is 2548.70 BDT. But, today it is
11 February 2020. Using the Future value concept, the value on 11 February 2020 can be
calculated.
Value( per share) of RBBL at 11 February 2020 = 2548.70*(1+(.1975/12)^(1+11/30)
= 2606.18 BDT
As the current market price is 3,068 BDT (per share) which is higher than the fundamental value
(per share) of 2606.18 BDT. The stock should not be purchased, as overvalued, rather should be
sold.

Relative valuation model

From conducting the relative valuation, GlaxoSmithKline Bangladesh Limited (GSK) has been
chosen. The reasons for the choice are given below:

• Both the companies have no long term interest-bearing loan

• They are the most highly valued company in the DSE market.
• Both the companies are in the pharmaceutical industry
Though they have a very distinct product type and are no immediate competitors, no other
comparable companies are there in the DSE market due to huge difference in market capitalization
& per share price.
Collected data of GlaxoSmithKline Bangladesh Limited (GSK)for conducting the valuations are
given below:

Page | 24
Figure name: the collected of GlaxoSmithKline Bangladesh Limited (GSK)

Source: GSK Bangladesh Annual report

The last five years’ and the average Historical price/ earnings ratio, price/book value ratio,
Price/Cash flow, price/ earnings before interest, tax, depreciation, Price/Sales of both of the
companies have been calculated they are given below:
Figure name: the collected and calculated Data of GlaxoSmithKline Bangladesh Limited
(GSK)
Figure name: calculated Data of GSK Bangladesh Ltd and Reckitt Benckiser Bangladesh
Ltd

Source: Author

Page | 25
The required assumptions for determination of share price of RBBL (under relative valuation) are
given below:

• GSK Bangladesh is comparable to RB Bangladesh Limited

• The average of all those ratios during the last 5 years of GSK has been used as the multiple
for determination of the value of the share of RB Bangladesh.
• The EPS, Book value or Equity, cash flow, sales, EBITDA in the constructed Pro-forma
income statement and balance sheet of RBBL have been used in the calculation of share
price using relative valuation.
• The average EPS, EPS, Book value or Equity, cash flow, sales, EBITDA of GSK
Bangladesh have been used in the relative valuation calculation.
The calculated multiple ( Average of those ratios of GSK ) is given below:
Assumed multiple for Relative Valuation of RBBL’s share

Source: Author
These multiples of GSK has been used as the multiple of RBBL for calculating the intrinsic value
Using Price- Earning ratio of GSK as the multiple, the intrinsic value of RBBL is given
below:

Source: Author
Comment: The calculated intrinsic value of 2,064.61 BDT (per share), using the Price/EPS ratio
of GSK as the multiple, is lower than the current market price of 3,068 BDT (per share). The share
price is overvalued. The multiple used for estimation of the share price is close to the average P/E
ratio of RBBL. It gives a better estimate than the other ratios.

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Using Price- Book value of GSK as the multiple, the intrinsic value of RBBL is given below:

Source: Author
Comment: The calculated intrinsic value of 749.94 BDT (per share), using the Price/EPS ratio of
GSK as the multiple, is lower than the current market price of 3,068 BDT (per share). The share
price is overvalued. The multiple used for estimation of the share price is very different from the
average P/BV ratio of RBBL. It gives a really poor estimation.
Using Price- Earning before interest, tax and depreciation adjustment (EBITDA) of GSK as
the multiple, the intrinsic value of RBBL is given below:

Source: Author
Comment: The calculated intrinsic value of 3088.64 BDT (per share), using the Price/EBITDA
ratio of GSK as the multiple, is higher than the current market price of 3,068 BDT (per share). The
share price is undervalued. It should be purchased. The multiple used for estimation of the share
price is close to the average P/EBITDA ratio of RBBL. It gives a better estimation than the other
ratios.
Using Price- Cash flow of GSK as the multiple, the intrinsic value of RBBL is given below:

Source: Author
Comment: The calculated intrinsic value of 1582.18 BDT (per share), using the Price/Cash flow
ratio of GSK as the multiple, is lower than the current market price of 3,068 BDT (per share). The
share price is overvalued. It should not be purchased The multiple used for estimation of a share
Page | 27
price is half of the average P/Cash flow ratio of RBBL. It gives a poor estimation of the value of
the share of RBBL.
Using Price- Sales of GSK as the multiple, the intrinsic value of RBBL is given below:

Source: Author
Comment: The calculated intrinsic value of 3083.64 BDT (per share), using the Price/Sales ratio
of GSK as the multiple, is higher than the current market price of 3,068 BDT (per share). The share
price is undervalued. It should be purchased. The multiple used for estimation of the share price is
closest to the average P/sales ratio of RBBL. It gives the best estimation than the other ratios.
Based on the relative valuation model, the share of RBBL should be purchased according to Price-
EBITDA and Price-Sales multiple and RBBL’S share should not be purchased according to the
other multiples.

The growth duration of RBBL

Assumptions:

• The average 5 years dividend yield of GSK Bangladesh has been assumed as the expected
dividend yield.
• The expected growth rate of GSK= 5 years’ average retention ratio* 5 years average return
on equity of the company.
• The expected dividend yield and growth rate of the company is calculated using Pro-forma
financial statement where Expected growth rate= estimated retention ratio* estimated
return on equity
• The expected dividend yield of RBBL= estimated dividend per share/ RBBL per share
price of RBBL on 11 February 11, 2020.

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Duration calculation with estimates
Figure name: Growth duration Calculations and Assumptions

Source: Author
Comment: the calculated growth duration of 1.05 years tells that RBBL can continue to grow at
a rate of 12% for 1.05 years after which it is assumed that RBBL will grow at a rate of nearly 11%
which is equal to its counterpart GlaxoSmithKline Bangladesh Limited.

Conclusion
Maximum model of calculating the intrinsic value of the company suggests that the company’s
share price is overvalued and should not be purchased rather be sold by the shareholders of the
company, based on the assumptions made. Only the relative valuation method's Price/sales
multiple and Price/ EBITDA suggest the share price is undervalued and should be purchased.

Page | 29
Appendix

RB Bangladesh LTD 5 years’ Balance sheet

Source: Annual report RBBL

Page | 30
RB Bangladesh LTD 5 years’ income statement

Source: Annual report RBBL

The historical segmented income statement

Source: Annual report RBBL

Page | 31
Monthly DSEX return and RB Bangladesh stock return

Source: Stock Bangladesh

Page | 32
Relative Valuation Data ( RBBL)

Source: Annual report RBBL

Relative Valuation Data ( GSK Bangladesh LTD)

Source: Annual report GSK

Page | 33
WACC Calculation with assumptions

Source: Author
Revenue growth rate calculation

Source: Annual report RBBL

Page | 34
Financial statement analysis

Source: Author

Page | 35
Source: Author

Page | 36
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