Equity Research Report of

Square Textiles Ltd

Course: Lease Financing and Investment Banking (F-610)
 Presented By

SL Name ID
01. Md. Iqbal Hossain 38003
02. M M Shaheen 38011
03. A F M Hasanul Bannah 38012
04 Md. Ahsanul Hoque 38013

Mohammad Zabed Hossen 37009

 Introduction
Equity Research Report?
An equity research report is a document prepared by
an Analyst that provides a recommendation on whether
investors should buy, hold, or sell shares of a public company.
Additionally, it provides an overview of the business, the
industry it operates in, the management team, its financial
performance, risks, and the target price.
Techniques used to determine value-
 Analyze Cash Flow Statement
 Dividend Discount Model,
 Cash Flow Model
 Relative Valuation Model and
 Residual Income Model
 Executive Summary

We have analyzed the cash flow and

completed different valuation model to
determine the fair value of Square Textiles
and everywhere we found that the current
market value is lower than the fair value,
so we strongly recommend that investors
should buy the shares of Square Textiles
Ltd.
Methodology

A study on a
comparative • Square Textile Ltd
analysis

A matter of
quantitative • Data collected from annual report
judgment

Used our • Calculate different ratios &

analysis tool
to analyze
analyze data thoroughly to
data provide rational interpretation
 Company Overview
Square Textile
Year of Establishment
Unit 1 : 1994

Manufacturing Business
100% Cotton Ring Spun Yarn for Hosiery

Target Market
Export Oriented RMG Industry

Listed company:
2002

Capacity
Daily production capacity of 20,000 kgs.

Investment
Unit 1 : US$ 20.00 mln ; Unit 2 : US$ 13.50 mln ; Unit 3 : US$ 12 mln
 Company Overview

Square Textile Ltd

Year Cash dividend Stock dividend EPS

2018 20% 5% 2.43

2017 20% 5% 2.29

2016 25% 10% 4

 Ratio Analysis

Liquidity Ratio of Square Textiles Ltd

 Findings:
3.50

3.00
2.96  Current liability were lower compared to
2.73
current assets.
2.50
 Company relies too much on inventory or other
assets to pay its short-term liabilities
2.04
1.98
2.00
1.76

1.50
1.48
 Short-term obligations using only cash and cash
1.29
1.17 equivalents is growing over time.
0.93
1.00
0.72
 Square textile Ltd can pay off its current
0.64

0.50
0.36
liabilities with the cash flow, generated from
0.33
0.15 core business operations is decreasing over
0.03
0.00
2014-2015 2015-16 2016-17 2017-18 2018-19
time.
1. Current Ratio 2. Quick Ratio 3. Cash Ratio
 Debt Coverage Ratio
Debt Coverage Ratio

Square Textiles LTD.

Year 2018-19 2017-18 2016-17 2015-16 2014-15 Avg.

1. Debt ratio 44.87% 35.39% 27.65% 21.29% 25.15% 0.31

2. Debt-equity ratio 81.54% 54.95% 38.33% 27.11% 33.67% 0.47

3. Time Interest coverage ratio 0.94 1.40 1.84 4.97 4.92 2.82
 Debt Coverage Ratio

Debt Ratio: The higher the ratio, higher the leverage and higher is the
financial risk on account of heavy debt obligation (in the form of Interest and
Principal Payments) on the part of the business. The above figure shows that
Square Textile is in better position.

Debt-equity ratio: Considering the above debt-equity ration, Square

textile is in better position.
 Profitability Ratio
Profitability ratio of Square Textiles Ltd

18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00% 2014-2015 2015-16 2016-17 2017-18 2018-19

 Efficiency Ratio

Accounts receivable turnover

0
2019-18 2018-17 2017-16 2016-15 2014-15 Avg.
 Efficiency Ratio

Average collection period

120

100

80

60

40

20

0
2019-18 2018-17 2017-16 2016-15 2014-15 Avg.
 Efficiency Ratio

Inventory Turnover Ratio

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2019-18 2018-17 2017-16 2016-15 2014-15 Avg.
 Efficiency Ratio

Fixed asset turnover

2.5

1.5

0.5

0
2019-18 2018-17 2017-16 2016-15 2014-15 Avg.
 Free Cash Flow Model:
Free cash flow to the firm is the cash flow available to the company’s
suppliers of capital after all operating expenses (including taxes) have been
paid and necessary investments in working capital (e.g., inventory) and fixed
capital (e.g., equipment) have been made. FCFF is the cash flow from
operations minus capital expenditures.  

Free cash flow to equity is the cash flow available to the company’s holders
of common equity after all operating expenses, interest, and principal
payments have been paid and necessary investments in working and fixed
capital have been made. FCFE is the cash flow from operations minus capital
expenditures minus payments to (and plus receipts from) debt holders.
.
 Free Cash Flow Model:
June 30, 2019
Income Statement June 30, 2019 Taka Income Statement Taka

Non-Controlling Interest -1,338,236

Sales Revenue 10,562,041,464
Cost of Goods Sold -9,425,402,349 FCFF 429,023,969
Gross Profit 1,136,639,115
Terminal Value 9,009,503,349
Administrative Overhead -278,901,489
Selling and Distribution Overhead -15,559,867 Total Cash Flow 9,438,527,318
Profit from Operations 842,177,759
PV Of FCFF 9,438,527,318
Finance Cost -280,059,922
Non-operating Income 12,790,260 Net Debt 0
Profit Before W.P.P.F & W.F 574,908,097
PV of FCFE 9,438,527,318
Allocation for W.P.P.F & W.F -27,376,576
Profit Before Tax 547,531,521 No of Share Outstanding 197,252,000
Provision for Tax (Current) -59,896,768
Equity Value per share 47.85009692
Provision for Tax (Deferred) -57,272,548
Profit After Tax for The Period 430,362,205 * Constant Growth Rate 5%
 The dividend discount model (DDM):

We can take that same approach as GGM, and tailor it specifically

for analyzing a stock that pays good dividends, and this is the
Dividend Discount Model. It’s also called the Dividend Growth
Model, and the most straightforward form is called the Gordon
Growth Model.

The DDM is based on the exact same idea, except that the share of
stock represents what we’re valuing, and all future dividends
represent all future cash flows of that share. The value of the stock
is equal to the sum of the net present value of all future dividends.
 The dividend discount model (DDM):
Square Textiles Ltd
Dividend Discount Model
Particulars 2017-2018 2016-2017 2015-2016 Remarks
Return on Equity (ROE) 0.0614 0.056 0.1019 (NI/E)
Dividend payout ratio (DPR) 0.63 0.78 0.35 (D/NI)
Retaintion Rate (RR) 0.37 0.22 0.65 1-DPR
Growth (g) 0.5 0.06 0.05 ROE X RR
Rate of Return (Ke) 0.1 0.1 0.1 RF+B(RM-RF)
DPS 1.8 1.7 1.6 D/No of Share
Current Mrk price 33.1 45.34 55.87

Valuation on the basis of DDM (Do) 34.87 55.21 72.76 (D1/(1+Ke))+(D2/(1+Ke)^2)+((D3+P3)/(1+Ke)^3)

Beg. Mrk Price<DDM Price= Undervalued
Mrk Value Justification UndervaluedUndervalued Undervalued
Beg. Mrk Price>DDM Price= Overvalued
 Valuation Models:

Relative Valuation:
 We have taken fine companies for relative valuation.
 Our target firm is Square Textiles Ltd.
 Other comparable firms are, HR and Shasha Denims Ltd.
We tried to estimate the current stock price of Square Textiles Ltd.
 Relative Valuation

    Comparable Firms

Measures Target Firm Shasha Denims HR Textiles

Current Stock Price ? 57 38.4
EPS 2.43 4.64 1.7
BVPS 39.62765947 26.79567 15.36403091
CFPS 0.29 2.22 6.04
SPS 50.10069871 52.13837675 80.01570043

  Shasha Denims HR Textiles Average

Current Stock Price 57 38.4  
P/E 12.28448276 22.58823529 17.43635903
P/BVPS 2.127209359 2.4993441 2.313276729
P/CFPS 25.67567568 6.357615894 16.01664578
P/SPS 1.093244622 0.479905816 0.786575219
 Relative Valuation

  Target Firm Avg. Measurable Estimated Stock Price

EPS 2.43 17.43635903 42.37035243
BVPS 39.62765947 2.313276729 91.66974249
CFPS 0.29 16.01664578 4.644827278
SPS 50.10069871 0.786575219 39.40796806
    Average 44.52322257

After the calculation we got that, Square Textile’s stock price

should be 44.52 bdt. But in that time their share was trading in the
market for 50.08 bdt. So, their share was overvalued back then.
 Residual Income Valuation:

Residual valuation
Particulars 2017-2018 2016-2017 2015-2016

ROE 0.06 0.06 0.10

Rate of Return (r) 0.10 0.10 0.10

BVPS 39.63 39.10 39.07

RIps=(ROE-r) X BVPS (1.53) (1.72) 0.04

 Residual Income Valuation:

Residual valuation
Particulars 2017-2018 2016-2017 2015-2016
Rate of Return (Ke) 0.10 0.10 0.10
BVPS 39.63 39.10 39.07
RIPS (1.53) (1.72) 0.04
Current Mkt price 33.10

Valuation on the basis of RI Vo=

BVPSo+(RIPS3/(1+r)^3)+(RIPS2/(1+ 37.01
r)^2)+(RISP1/(1+r))

Mrk Value Justification Undervalued

 Summery: Residual Income Model

We can see in the residual income valuation

that the stock price of Square Textile’s is
undervalued and here we found that fair
value of Square Textile’s should be BDT37.01
but currently it’s market value is BDT33.10.
Valuation with reference to Earning-Based-Value Per Share Considering Textile Sector P/E

Year No. of Share Net Profit After Tax Weighted (%) No of Share Weighted Net Profit After Tax
2018-19 197,252,000 430,362,205 0.225550656 97068477.76
2017-18 187,859,048 459,472,296 0.214810149 98699312.48
2016-17 178,913,379 413,735,692 0.204581094 84642500.69
2015-16 162,648,527 744,980,181 0.185982814 138553510.3
2014-15 147,862,298 809,546,054 0.169075286 136874230.8
Total 874,535,252 2,858,096,428 1 555838032
Number of Shares outstanding 197,252,000
Weighted Average Earning Per Share(EPS) 2.817908219
DSE Textile Sector Average P/E May'19 16.15

Earning-Based-Valur Per Share (BDT) 45.50921774

Calculation of Textile Sector P/E      
Particulars 19-Jun 19-May 19-Apr Average
Sectoral Market P/E(Textile Sector) 16.79 16.18 15.48 16.15
Valuation with reference to Earning-Based-Value Per Share Considering Textile Sector P/E

Earning-based-value per share based on historical information sourced from

audited financial statements and statistics from Dhaka Stock Exchange
Limited (DSE). The value was calculated by considering weighted net profit
after tax for last 5 (five) years as per audited financial statements and sector
earnings multiple. The weighted average Earnings per share (EPS) is BDT
2.82 and the 3 months average DSE Sector P/E is 16.15. Therefore, Earning-
based-value per share has been derived as BDT 45.51.
 We have selected Square Textiles as
the industry leader as it has the
stable financial position. Finally, we
have calculated the share price of
the Square Textiles Ltd by using
different valuation model and
everywhere we found that the
current market price is lower than
Conclusion the calculated price so this is an
undervalued share and
recommended that the investors
should buy the shares of the Square
Textiles Ltd.