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Financial Analysis Overview of Heidelberg Cement Bangladesh Limited


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Short Financial Analysis of Heidelberg Cement Bangladesh Limited including dividend policy, ratio analysis, and share price trend.

Financial Analysis Overview of Heidelberg Cement Bangladesh Limited

  1. 1. FINAL PROJECT ON HEIDELBERG CEMENT BANGLADESH LIMITED ACT 330.2 GROUP MEMBERS Nazib Haider Chowdhury Id: 081 703 030 Faiyaz Hossain Id: 081 046 030 Fahim Ahmed Id: 081 247 030 Md. Sayeed Id: 081 729 530 DATE: 13TH April, 20111|Page
  2. 2. April 13, 2011Rakibul HasanCourse InstructorACT 330North South UniversitySubject: Submission of the final project of ACT 330Dear Sir,Here is the final project for the course ACT 330. The report is on the company namedHeidelberg Cement Bangladesh Limited.In this report we have included all the required data you have asked us to represent. Finally,we have attached the financial statements in the appendix.If you have any questions about this paper, or need clarification about any of the informationit contains, please do not hesitate to contact us at We look forward to hearing from you soon.Sincerely yours,_______________ _________________Faiyaz Hossain Fahim AhmedId: 081 046 030 Id: 081 247 030____________________ ________________Nazib Haider Chowdhury Md. SayeedId: 081 703 030 Id: 081 729 5302|Page
  3. 3. TABLE OF CONTENTSINTRODUCTION .............................................................................................................. 1DISCLOSURE .................................................................................................................. 6SHARES ............................................................................................................................ 9RATIOS & ANALYSIS .................................................................................................. 11DIVIDEND POLICY ....................................................................................................... 153|Page
  4. 4. INTRODUCTIONHeidelberg Cement Bangladesh Limited meets 13% of the Bangladesh demand for cementfrom two plants located at Dhaka & Chittagong. Heidelberg Cement Bangladesh Limitedemploys 260 people across the country. The company with 1.5 million tones annual cementproduction has become a major force in the Bangladesh Cement industry over the last eightyears Through acquisition of Chittagong Cement Clinker Grinding Company Ltd., it hasbrought together regional manufacturing whose history stretches back to the very beginningof commercial cement production in Bangladesh. In Bangladesh, Heidelberg group is one ofthe largest foreign investors having an investment of 100 million US$ with more than 260employees working round the clock to materialize the mission of this great global company.By satisfying the needs and aspirations of its customers, employees, shareholders and thewider community, the company is able to maintain its position of strength as a sustainablecement provider without compromising commitment to long term stability and environmentalresponsibility. Heidelberg Cement Bangladesh Limited is a sister concern of HeidelbergCement Group.ProductsAs part of its relentless pursuit for innovation and constant drive to improve quality,Heidelberg Cement has introduced Portland Composite Cement, Scan Cement andHeidelberg Cement. Absorbing European Norms in cement producing made HeidelbergCement Bangladesh Ltd. the pioneer in this sector. Now-a-days all the cement factories ofBangladesh are producing cement as per European Norm. The category Portland CompositeCement (CEM II) is the market leader in Europe.Why select Heidelberg?One of the major reasons for selecting Heidelberg Cement is the disclosure of major data tocalculate and fully analyze the results. The readily available information through the internetmakes Heidelberg a lucrative company to do this project on; since most of the requiredinformation is readily available in their website which is also very systematic. These4|Page
  5. 5. favorable conditions made Heidelberg Cement Bangladesh Limited a very reliable companyto do our project on.Scope and Objective of the StudyFor more in-depth knowledge about Heidelberg Cement Bangladesh Limited’s performanceand dividend policy, we will have to conduct relevant ratio analysis with the help of the datapresented in its financial statements and notes.Heidelberg Cement Bangladesh Limited’s Objective: To meet the course requirement of the term paper. To have a better understanding of the ratios Assess Heidelberg Cement Bangladesh Limited’s dividend policy and any trend of dividends Calculate Heidelberg Cement Bangladesh Limited’s financial ratios to estimate its performance graph Finally evaluating any correlation among Heidelberg Cement Bangladesh Limited’s performance, dividend policy and stock price.Limitation of the StudyWe had come across a few problems while trying to get as precise data as possible from ourattempt. Still, we would like to mention the main parts which were the headlines: Time. Subjective data. Data limitations as not enough information is provided i.e. monthly details not known results are based on past performances not present. We were restricted to use financial statements of 2008 as the most recent one because the most recent financial reports (i.e. 2009 & 2010) were not available anywhere, not even in the library of Dhaka Stock Exchange.5|Page
  6. 6. DISCLOSUREThe notes that are disclosed in the financial statement of Heidelberg Cement LimitedBangladesh are as follows:  Reporting Entity.  Basis of preparation (basis of measurement, functional and presentational currency, use of estimates, going concern principles, and so on).  Significant accounting policies (property, plant and equipment, depreciation, impairments, different assets and liabilities etc).  Property, Plant and Equipment (their depreciation and disposal).  Capital Work in Progress.  Deferred Tax Assets.  Inventories.  Accounts receivables.  Advances, Deposits and Prepayments.  Cash.  Creditor for goods.  Provision for tax.  Deferred liability.  Finance lease.  Share capital.  Reserves and Surplus.6|Page
  7. 7.  Turnover.  Cost of Goods Sold.  Administration, Selling and Distribution Expense.  Emoluments to directors.  Emoluments to managers.  Contribution to employees’ provident fund and pension fund.  Other income.  Profit for the year before tax.  Remittance of foreign currency.  Earnings in foreign currency.  Earnings per Share.  Number of employees.  Related Party transaction.  Capital expenditure commitment.  Contingent Liabilities.The company should also disclose the following:  The terms of or obligation imposed by purchase commitments.  Special financial arrangement and instruments.  Depreciation policies.  Any changes in the application of accounting principles.  Existence of contingencies.7|Page
  8. 8.  The credit terms of the companyThe notes give a better insight about how the company is handling its financial issues. Forexample, seeing the notes we can deduce what assets the company holds, what assets it hasleased and what assets were sold or bought. This extra information gives investors a betterpicture of the company’s operations and becomes the deciding factor when an investor wantsto invest.Effective management of the risks and opportunities associated with significant social, ethicaland environmental issues is an important component of good governance practice.Companies that ignore such risks may suffer serious damage to their reputation and brandvalue, as well as litigation and operational risks. Creating a “governance culture” oftransparency and accountability that goes beyond mere compliance with codes and legislationis key to addressing these aspects of performance effectively. Well-known scandals illustratejust how important it is for companies to be alert to the business risks inherent in a broadrange of issues, such as fraud, bribery and corruption, insider trading, climate change, humanrights, labor standards including those in supply chains and the health impacts of products.In regards to this, the company also disclosed the environmental issues both in their annualreport and in their official website. Heidelberg Cement Bangladesh Limited has also engageditself in hordes of CSR activities such as Food Relief, setting up Medical Camps, arrangingdonations for Land Slide victims etc. It is crucial that a company should disclose these sort ofissues since it builds on the goodwill of the company and it is reflected in their rising shareprices.8|Page
  9. 9. SHARESHeidelberg Cement Bangladesh Limited has issued only common shares. The par value of theissued shares is tk100. the strength of a company in order to issue new shares is reflected byits profitability. Heidelberg Cement Bangladesh Limited has shown a steady consistentprofitability which shows that if the company wants it can issue new shares. However, beforeconsidering issuing new shares, Heidelberg Cement Bangladesh Limited should weigh seek isthere any other debt financing with a low interest rate.9|Page
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  11. 11. RATIOS & ANALYSISThe most significant item in the cash flow under investing and financing items werepurchase of fixed assets and short term loan received, respectively. This reflects HeidelbergCement Bangladesh Limited was focusing on expanding their business by increasing theiroutput.Evaluations:Liquidity RATIO FORMULA 2004 2005 2006 2007 2008 Current ratio (Times) CA/CL 0.57 0.70 0.87 1.03 1.27 Quick ratio (Times) (CA-Inventory)/CL 0.53 0.24 0.48 0.71 0.66 Current cash debt Cashflow from Op. coverage ratio Act/Average CL 0.09 0.05 0.62 0.53 0.01The current ratio of Heidelberg Bangladesh Limited has shown steady growth over the five-year period, from 0.57 (in 2004) to 1.27 (in 2008). This indicates that Heidelberg has now hasmore current assets to cover its current liabilities. It can also be inferred that Heidelberg’sworking capital finally became positive in 2007, possibly allowing the company to use theamount in various long-term asset financing schemes. However, the quick ratio paints adifferent picture. A quick ratio of 1 is ideally preferable, indicating that a significant portionof Heidelberg’s current assets is tied up in slow-moving inventories.The current cash debt coverage ratio measures whether a company can cover its currentfinancial obligations during a fiscal year from cash generated in operations. Heidelberg’scurrent cash debt ratio has improved by about 1140% in 2006, with it remaining steady in2007. In 2008 Heidelberg incurred large expenses in paying off its suppliers, leading to verylow value of 0.01. Nevertheless, in the five year period current cash debt coverage was neverabove 1, meaning that Heidelberg is unable to pay off its current liabilities from itsoperations.Overall, the liquidity position is mixed. While not worrying, Heidelberg should closelymonitor its dropping quick ratio and cash debt coverage ratio.11 | P a g e
  12. 12. Activity RATIO FORMULA 2004 2005 2006 2007 2008 Receivables turnover Sales/Avg A/R 9.68 8.06 9.79 9.96 10.53 Inventory Turnover COGS/Avg Inventory 5.61 4.18 6.35 6.51 3.54 Asset Turnover Sales/TA 0.79 0.85 1.21 1.09 1.08Heidelberg has a receivables turnover of 9.61 over the 2004 – 2008 period, with 2008 beingthe highest. This means the company is able, on average, to quickly and efficiently collect itsoutstanding receivables 9.61 times a year, which shows good liquidity position. The companyhas had a stable inventory turnover from 2004 to 2007 (averaging 5.66), but this dropped to3.54 in 2008 mainly due to Heidelberg increasing its inventory by 114.88%. This looks to bea one-off transaction, so the drop in liquidity should not be worrying.Asset turnover has steadily increased from 0.79 in 2004 to 1.21 in 2006. In 2007 and 2008,turnover remained steady around 1.085. Thus, Heidelberg is now more efficiently using itsassets to generate sales, breaking even in 2006 and maintaining the one-to-one sales/assetactivity rate.Liquidity and activity wise, Heidelberg is currently in a stable. However, they should takenote of their low inventory turnover in 2008 and be careful of not ending up with a largeinventory policy that may incur excessive carrying costs in the form of storage, investment,obsolescence etc.12 | P a g e
  13. 13. Profitability RATIO FORMULA 2004 2005 2006 2007 2008Net profit margin (%) NP/Sales -.003 0.04 0.10 0.11 0.09 ROA (%) NP/TA -.002 0.03 0.13 0.12 0.10 ROE (%) NP/Equity 0.01 0.08 0.22 0.22 0.18 Payout ratio (%) Dividend/NP 0.17 0.23 0.31 Plowback ratio (%) 1-Payout ratio 0.83 0.77 0.69 Earnings per share NI/Avg C.Stock 3.00 31.00 96.92 110.00 104.86Like previous economic indicators, Heidelberg’s profit margin has show steady growth overthe years, peaking at 11% in 2007. Profit margin was slightly lower in 2008 at 9%.In 2008, Heidelberg’s return on total assets was 10%, significantly up from -0.2% in 2004.The company has been better able to utilize its assets to generate profit in the recent years.The company’s return on equity shows a similar trend, with ROE being highest from 2006 to2008 at average of 21%. It should be noted that historically, the rate of return on total assetshas been significantly lower than Heidelberg’s rate of return on common shareholders’equity. When return on asset exceeds return on equity, a company is said to be trading in theequity. Trading on the equity refers to the practice of borrowing funds at fixed interest ratesor issuing preferred stock with constant dividend rates; preferably rates that are lower thanthe rate of return obtained on assets. If this can be done, the money obtained frombondholders (or preferred shareholders) earns enough to pay the interest (or preferreddividends) and to leave some margin for the common shareholders, earning them extrarevenue. Since Heidelberg’s ROE has always been higher than its ROA, it is unable to takeadvantage of trading in the equity. This also explains why Heidelberg has not issuedpreferred shares, as it would prove unprofitable.The dividend payout ratio has steadily increased, being highest in 2008 at 0.31. Theincreasing trend of the ratio should leave Heidelberg investors satisfied on the good yield onthe stock. Earnings per share has also increased over 2004-2008. Earnings was highest in2007 at 110, this fell slightly by 4 points in 2008.Overall, Heidelberg’s profitability position has strengthened over time. All indicators showpositive growth, indicating that the company is pursuing the right strategy in terms of usingits assets to create revenue.13 | P a g e
  14. 14. Coverage RATIO FORMULA 2004 2005 2006 2007 2008 Debt to total assets TL/TA ratio 0.58 0.57 0.44 0.45 0.44 Cash debt coverage Cashflow from Op ratio Act/Avg TL 0.04 0.04 0.56 0.49 0.01 Book value per share Common Stock/Oustanding shares 0.41 0.38 1.00 1.00 1.00Times interest earned EBIT/Interest ratio 0.42 2.07 6.77 12.87 11.26From 2004 to 2008, Heidelberg has gotten better at financing its total asset needs with fewerliabilities, as debt to asset ratio has slowly dropped over the 5 year period.The company also has gotten better at covering its financial obligations with cash generatedfrom its operations – Heidelberg is able to meet 56% of its total liabilities with cash fromoperating activities in 2006 and 49% in 2007. In 2008, they are only able to cover 1% - again,as stated before during that year Heidelberg’s payment to suppliers was a sizeable amount.This drop in cash debt coverage in 2008 is likely a one-off deal.Book value per share increased from 0.41 in 2004 to 1.00 in 2006, from where it maintainedthat value through 2007 and 2008.Looking at the times-interest earned ratio, we see a positive growth trend. This signifies thatHeidelberg have gotten better at being able to cover its mandatory interest payments withoperating profit, with the highest TIE ratio of 12.87 observed in 2007.Overall, except the cash debt coverage Heidelberg seems to be doing a good job of coveringits financial obligations with its assets and revenue sources.14 | P a g e
  15. 15. Dividend Policy Historically, Heidelberg Bangladesh Limited has always offered common shares. From 2001 onwards, Heidelberg Bangladesh Limited has been offering dividends on the amount of its common shares outstanding. Initially it was seen that Heidelberg primarily provided bonus stock shares as dividend. This has changed in recent years with the company offering a mix of stock and cash dividends, and starting from 2007 only cash dividends. As of 2009, Heidelberg has authorized 1 million shares to be sold at a par value of Tk 100 each, with about 538 thousand shares being currently traded in both the Dhaka Stock Exchange and the Chittagong Stock Exchange. Below is a snapshot of Heidelberg Bangladesh Limited’s dividend policies over the years 2004 – 2008. 2004 2005 2006 2007 2008Number of shares oustanding 4,181,270 4,892,086 5,381,294 5,650,358 5,650,358Capital issued and fully paid 418,127,000 489,208,600 538,129,400 565,035,800 565,035,800 Cash dividend @ 8% and Cash dividend Proposed Dividend Scheme Stock @ 16% and Cash Cash Stock dividend dividend Stock dividend dividend @ dividend @ @17% @10% @5% 25% 33%Stock dividend (proposed) 71,082,000 39,137,000 26,907,000 0 0Cash dividend (proposed) 0 48,921,000 86,101,000 141,259,000 186,462,000Total Proposed Dividend 71,082,000 88,058,000 86,101,000 141,259,000 186,462,000 Analysis During the period of 2004 to 2008, Heidelberg shows a noticeable trend in terms of dividend policy. As we can see from the table, in 2004 the company only proposed to pay stock dividends of 17% on retained earnings. From 2005 to 2006, they began offering a mix of cash and stock dividends, with cash dividends holding a higher percentage in the latter year. From 2006 onwards, Heidelberg has only offered cash dividends, and this has steadily increased, being 25% in 2007 and 33% in 2008. Overall, the total value of proposed dividend has risen over the years. 15 | P a g e
  16. 16. However, in all 5 years the amount of dividend proposed has not matched the actual dividend paid. This dividend was paid from Heidelberg’s unappropriated funds, or retained earnings. Whether to issue dividends and what amount, is calculated mainly on the basis of the companys unappropriated profit and its earnings prospects for the coming year. A comparison of the dividend amount paid and the unappropriated profit in 2004 – 2008 shows us 2004 2005 2006 2007 2008Dividend Paid 203 86 37,657 83,103 120,861%increase in dividend paid -58% 43687% 121% 45%Total Funds available for appropriaton 651,691 720,461 1,153,982 1,662,515 2,113,779%increase in unappropriated funds 11% 60% 44% 27%Cash flow balance 56,201 19,888 91,227 851,203 768,454 Figures in thousand BDTs Retained earnings (unappropriated funds) have steadily increased from 2004, showing sharp positive growth in the years 2007 and 2008. In contrast, this has not matched with the pattern of dividend payment, contradicting the common belief that most firms pay a dividend that is relatively constant over time. However, the cash balance of Heidelberg adequately covers and exceeds all the dividend payments, and we can conclude by saying that the company was more than liquid enough to meet the payments. Using EPS as an Analysis Tool The portion of a companys profit allocated to each outstanding share of common stock is known as the earnings per share. Earnings per share serves as an indicator of a companys profitability. Looking at Heidelberg’s earnings per share, we can concur that the correlation between dividends paid per share and EPS is weak at best. While it is apparent that DPS is large when EPS is positive, the rate of change of both statistics is inconsistent for us to allude to any direct influence of one over the other. 2004 2005 2006 2007 2008 Dividends per share 4.855 0.018 6.998 14.708 21.390 Earnings per share -3.000 31.000 96.924 110.000 104.865 16 | P a g e