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Company valuation

Table of Contents1.0.Company profile of DBS group31.1.Organisation operational area31.2.DBS group holding limited net interest income position42.0.SWOT analysis53.0.Porters Five Forces analysis of DBS64.0.Ratio analysis75.0.Du Pont analysis126.0.Valuation156.1.Assumption156.2.CAPM model176.3.Risk-free rate176.4.Market Risk premium176.6.Dividend discount Model186.7. Free cash flow to equity model216.8. Price earnings ratio model236.9. Price book value ratio method256.10. Net tangible asset backing method287.0. Valuation Discussions297.8. Conclusion31REFERENCES32

1.0 Company profile of DBS group: DBS group holding limited is incorporated in republic of Singapore in 1968. The organisation is an investing holding company which operates through the main subsidiary of DBS bank limited. DBS is enlisted in Singapore Stock Exchange. Primary activity of DBS is to invest in its fully owned subsidiary like small and medium size enterprise, corporate and investing banking services etc. In spite of investing in fully owned subsidiary the group has also so many associates and joint ventures. It has prepared its financial report through group accounting system.Organisation operational area:The organisations financial business is segmented in the four parts customer or private banking, institutional banking, treasury and others. Customer or private banking serves the individual customers a range of products and financial services. Institutional banking serves the institutional clients including the bank and non-bank financial institution, large corporate, government linked companies and small and medium sized business. Treasury provides the treasury service to the institutions and private shareholders, corporations and to other market participants. Other is encompassed a range of activities from corporate decisions. The customer of the DBS holding company spreads in other countries: Hongkong, Singapore, India, China, Indonesia, and Malaysia and other countries. The organisation provides different services: currents and savings account, loan and home finance, credit card, fixed deposits and investment products. Enterprise banking segment provides the credit facilities like; over draft, account receivable purchase, trade services and financing, hire purchase and govt. financing etc. Corporate and investing banking segment provides the modified financial solution to the corporate and institutional clients. The DBS Holding organisation provides the equity services through DBS Vickers securities. The financial statement of the DBS is prepared in accordance with the FRS and promulgated by the ASC. The organisations income statement is not included in the financial statement. In the recent year the groups again adopt new revised INT FRS. DBS groups subsidiaries have the power to govern the financial and operating policies. The subsidiaries company has 50% voting rights (Robinson, 2008). DBS group follows the acquisition method to account the total business performance. The acquisition is measured as the date fair values of the asset transferred, the liabilities incurred and the equity interest issued. Acquisition related cost is expensed as incurred. Identifiable assets are acquired and liabilities or contingent liabilities are assumed as initially at the fair value on the date of acquisition. Joint venture of the DBS group are jointly controlled the group together through the contractual arrangements.1.1. DBS group holding limited net interest income position:Revenue($ millions) 2009 20102011

Net interest income 611456996555

The organisation net interest income in 2009 is $ 6114 million. That is decreased in 2010 at the rate of 6.79%. The reason behind this change is the new adopted FRS which is applied in the current financial year. In 2011, the net interest income of the group has also increased ($ 6555 millions). That is 15.02%. That affects the total income of the organisation in a large extent (7.40%). The organisations group performance is quite good in the recent years. Total income of the DBS has increased in this year (7.98%). Expense of the organisation has reduced in great extent (17.18%). In this year DBS did not provide any goodwill charges but in 2010 organisation provided the good will charges ($ 1018 million). So automatically the expense of the DBS group increase.

Share of profit associates with the organisations profit i.e. 24.5%. It also increases the DBS profit in the year 2011. Profit before tax of the organisation increases in this year at 61 percentages. It indicates that the organisation performance in the recent year is very good. DBS net profit for the year is $3290 million which increases in this year 76.88 percentages. It extends the organisations operational work to more efficient way (Sorensen & Willamson, 2007).

2.0. SWOT analysis:2.1. Strengths: The stronghold of DBS is its market share in Singapore and Hong Kong. The products and service offerings of DBS are diversified in nature and will help them in occupying more customers and generating bigger revenues (Krschner, 2008). Global Finance awarded DBS Best Bank in Singapore and Safest bank in Asia. These awards will take the brand image of the company at a higher level earning more customer loyalty. They have expanded their business in 15 countries serving around 4 million customers. In comparison to the other players in the industry the dividend yield provided by DBS is much better. The work force of DBS also contributes to the success of the company. They have around 20000 experienced and skilled professionals working for them in all their branches (Elton et al. 2009).2.2. Weakness: The main weakness of DBS is their low operations in the European and US market. Another main problem being faced by DBS is that the major portion of the revenues is coming from the banking and treasury sector. The other offerings are not being capable to generate the expected revenues (Brealey et al. 2008). 2.3. Opportunity: DBS has a good reputation and brand image in the banking industry. The asset management industry is also growing and the market entry barriers are very low (Bodie et al. 2008). Growth in the rate of retail savings and investments in the Asia pacific region provides a scope for taking their market share to a higher level. Developing neighboring countries like India offer opportunities of expansion and growth to the company.2.4. Threats: The effects of the global economic meltdown are still being faced by many industrial sections lowering the rate of investments (Levy, 2011). Moreover ambiguity in the Asian market and the global financial market will also affect the operations of DBS. The competition in the banking sector is increasing with more European banks entering Asian market and the market space is getting compressed. Liquidity regulations also affect the global banking sector (DeAngelo et al. 2007). 3.0. Porters Five Forces analysis of DBS:3.1. Threats of new entrants (Moderate): Banking sector is growing rapidly and though new banks are not coming up as a threat; other multinational banks are entering the Asian market. Banks like Standard Chartered, Deutsche Bank are growing their business in countries like India, Sri Lanka, Japan, etc. These countries are potential customers for DBS and can help them in growing their business and revenues.3.2. Power of Suppliers (Less): The power of suppliers majorly relies on the government grants and other supports. The power of supplier is negligible in the banking sector and does not influence the operations of DBS on a larger extent. However, the threat of losing employees may be high as other banks offering more remuneration may tempt skilled employees to switch.3.3. Power of Buyers (High): The buyers in the banking sector mainly refer to the consumers and other banks interacting with DBS. The products offered by the banks must be capable of attracting customers. As there are number of competitors available in the market, the buyers have many options to choose from. However, the brand image of DBS will help it in negotiating the power of the consumers (Woelfel, 2009).

3.4. Availability of Substitutes (High):The competition in the banking industry is very high. Apart from the local and regional banks, European multinational banks are also affecting the market of DBS. The products offered and the benefits provided by the competitors should be analyzed by DBS. Banks like Standard Chartered, Deutsche Bank are conquering the market of DBS.

3.5. Competitive Rivalry (High): The banking sector is extremely competitive. DBS should launch new and better products for their customers so that competitors dont think about switching their bank (Wahlen & Brown, 2010). The competition will tend to increase with the growth of the market, DBS cannot control the growth but they can formulate ways to minimize the competition by taking themselves to a higher level. 4.0. Ratio analysis: Ratio analysis is a tool which primarily uses for the measurement of the organisations financial performance. It is actually a quantitative analysis process. In this part author compares the three years financial position of DBS group holding limited.4.1. Net profit ratio in 3 years of the DBS group:PARTICULARS200920102011

NET PROFIT RATIO30.9126.32343.114

4.1.1. Analysis:Net profit ratio of the DBS group holding limited exposes the height of the profitability. The above table says that in 2009 the organisations profit is 30.91% which percentage is decreased in 2010 (4.587%). In 2009, DBSs profit percentage has increased at the rate of 25%. DBS is in well position to capture the opportunities for Asia resurgence. In 2010, it is slightly downward. That is 26.32%. After 2010 the net profit of the organisation is become high (43.14%). Foreign exchange differences is the another reason to increase the profitability of the DBS. The organisation balance sheet for three years shows that the DBS groups mainly profitability increases for growth of the net interest income in 2011. It increases from the previous year at the rate of 11.74%. So it denotes that the organisation profitability is in good position. In other way the DBS group holding limiteds expenses in this year is decreased in great extent. So it creates a positive impact on the clients of the company (Rhaiem et al. 2007). 4.2. Gross profit ratio:PARTICULARS200920102011

GROSS PROFIT RATIO38.40747.15548.919

4.2.1. Analysis:Gross profit ratio of the DBS group is 30.91%. The ratio is increased by 6% compared to the previous year. Gross profit of the organisation has increased because of the mix shifted of the savings account and current accounts. In 2010, it increases in high volume 47.16%. The main reason of the raise of the high gross profitability is the home market extends in Singapore at the rate of 15%. Hongkong market also increases in that year of 6.8%. Hongkong is the second largest market of the DBS group holding limited. Core earnings of the company are increased in 2011 - that is 29.1% ($ 2.65 billion). That is why the DBS groups gross profit position increases (1.764%). Another reason of the increase of the gross profit ratio is strong loan growth within the country, higher income of the cross selling activities and the improvement of the service quality.4.3. Return on capital employed: PARTICULARS200920102011

RETURN ON CAPITAL EMPLOYED9.834811.5869.5356

4.3.1. Analysis:The analysis shows that the return on capital employed of the organisation in 2009 is 9.83%. That increases in the year 2010 (11.59%). The primary reason of the growth of the ROCE is a large extent of the business volumes and the increase of the corporate banking segments. It increases the earnings before interest and tax at 1.75%. In comparison with the previous year (2009) the organisations share holders fund is not highly changed. It is increased only 4.83%. Compared to the shareholders fund the long term borrowing has increased in high volume (72.15%). It results in the minimum rate of growth of the ROCE in 2010. The analysis part shows that the return on capital employed of the DBS group is only 9.54% (2011). That means the EBIT rate is very low compared to the capital employed. So it affects the ROCE of the organisation. The other reason of the change the return on capital employed is significant rate of fees and huge interest cost.Current ratio:PARTICULARS200920102011

CURRENT RATIO1.0721.11721.11279

4.4.1. Analysis:Current ratio is indicated as 2:1 proportion. Current ratio of the organisation is fluctuating in every year. In 2009, it is 1.072 which increases in 2010. That is 1.12:1. In comparison to the previous year it increases in a small rate. The current asset amount of the DBS group is not very high than the current liabilities (229988: 214541) in 2009. So the ratio proportion of DBS is below the current ratio. It increases in 2010. It happens because of the increase of cash balance and huge growth of the advance and loan amount to the customers (Wahlen And Brown, 2010). It brings the positive impact on the organisation. Securities pledged (15.28%) is the another reason of the increase of the current ratio. In 2011, it has seen that DBS groups current ratio is again decreased and it 1.11:1. The primary reason of decrease this ratio is huge amount of deficit of cash balance in this year (2011).

4.5. Quick ratio:PARTICULARS200920102011

QUICK RATIO.466.49.451

4.5.1. Analysis:Quick ratio is indicated as 1:1 proportion. In 2009, the quick ratio indicates that the proportion of liquid asset and the liquid liabilities is not reaching the target proportion. So it understands that the organisations working capital position is not good. DBS group holding company more invest on the fixed assets. Financial manager of the organisation is not allocating the proportion of amount on the fixed and current assets. In 2010, the liquid ratio little proportion increases. It occurs for the small amount investment of the cash and reduces of the deferred tax liabilities. It has observed that the DBS group liquid ratio proportion in 2011 decreases. It happens for the high amount of increase of the due to bank amount increase of the group (Palepu and Healy, 2008). That is $ 27601 million. There are another reason which influences the liquid liability is due paid to non-banking customers, negative fair value on financial derivatives and other liabilities. All those reasons the DBS groups liquidity ratio cannot meet the target of 1:1 proportion (which is ideal for the company). 4.6. Debt collection period:Particulars200920102011

Debtors Turnover Ratio(Debtor / Credit Sales) * 36556.84 times82.52 times116.83 times

4.6.1. Analysis:In 2010 the debt collection period is 82.52 times if compare to the previous year i.e. 25.68 times. The company increases the lending rate to increase the turnover rate. The debtors turnover ratio is a measure of the number of times the debtors are rolled in a year hinting at the credit period allowed to the debtors and hence the working capital management. On the other hand the company significantly recovers the lending more than the lending rate. So, in this mean time the company enhances the debt collection period. During 2010 2011 the increase rate of debt collection period was more than the previous year. In this time the company again increases the lending more than the previous year. The analysis highlights that the company debt management is going in a smooth way, which is good sign for working capital of the company. Credit payment Period:Particulars200920102011

Debtors Turnover Ratio(Debtor / Credit Sales) * 36571.32 times23.26 times31.16 times

4.6.2. Analysis:The credit collection period of the company decreases significantly. That means the company also able to manage the credit given period. 5.0. Du Pont analysis: 5.1. Return on equity: Return on equity is the best indicator to judge the financial performance of a concern. Breakdown in return on equity into several parts to measure the performance more practically is known as du pont analysis (Pahl, 2009). This method used three components to judge the financial performance and these are Profitability efficiency and risk.5.1.1. Du Pont break downNet income/ Equity= (Net income /sales) (Net sales/ total Assets) (total assets /equity). = profit margin total assets turnover financial leverage.

For comparative analysis of DBS, Indofood a listed company in Singapore stock exchange is selected.

ParticularsDBS holding LTD

2007200820092010

EBIT/Sales31%20.5%30.15%41.6%

Sales/Total Assets23.9%34%26.6%15.6%

EBIT/Total Assets8%6.59%10.25%10.25%

Interest Expense/Total Assets0.0%0.0%0.0%0.0%

Net Before Tax/Total Assets7.9%7.3%12.2%9.4%

Total Assets/Common Equity191.5%190.1%182.2%179.5%

Net Before Tax/Common Equity15.2%13.8%22.2%16.9%

Return on Equity10.1%9.7%15.8%12.1%

33.1%19.7%49.7%46.3%

Particulars Indo food

2007200820092010

EBIT/Sales33.1%19.7%49.7%46.3%

Sales/Total Assets23.9%37.0%24.6%20.3%

EBIT/Total Assets7.9%7.3%12.2%9.4%

Interest Expense/Total Assets0.0%0.0%0.0%0.0%

Net Before Tax/Total Assets8%6%10%10.35%

Total Assets/Common Equity201%145%158%203%

Net Before Tax/Common Equity20.35%12%20.21%19.35%

Return on Equity15.36%10.25%25.3%22.56%

5.2. Evaluation of Du pont analysis: 5.2.1. EBIT/ Sales ratio: This ratio shows the relationship between sales and operating profits. This ratio is highly relevant for comparing the operating performance of same as well as different industries. Based on the above comparison EBIT of DBS group is slightly lower than Indofood. Now year wise analysis makes the study more practical.During the year 2007 performance of Indo food ltd is slightly better as it is able to earn 33.7% profit compare to DBS that earn 31%. This figure is quite satisfactory for DBS as in this year financial crisis just started in UK. Operating profit ratio of DBS in the year 2008 was 20.5% which is 0.8% more than Indofood limited. Rest of the years the performance of Indofood limited has been good.5.2.2. Sales to assets ratio: Sales to assets ratio reflect the companys efficiency to earn the profits on its assets investment. High proportion of sales to assets ratio indicates the higher efficiency of concerns assets. This ratio is quite useful for the mangers to take decisions on investments (Green et al. 2009). Sales to assets ratio also helps the managers for proper allocation of funds in working capital and in fixed assets. Indo food limited also performs better than DBS regarding sales to assets ratio. This company shows a consistent performance on its sales assets ratio. 5.2.3. EBIT/ total sales: This ratio signifies the efficiency of the firm to earn profits. This ratio also useful to offsets the effects of gearing. EBIT to total sales depicts the firms operating performance before providing for the financial obligations (Kothari & Zimmerman, 2006). Over last four year average EBIT/sales ratio of DBS is 8.77 whereas the EBIT/sales ratio of Indofood shows a figure of 9.20. This increase is mainly due to good operational performance of Indofood. The stability in EBIT/Total assets ratio may attractive to the new share holders to invest in DBS.5.2.4. Net before tax to total assets: This ratio is quite similar to EBIT/ total assets ratio the only distinction is that it takes financial obligations into account. It reflects the return on companys assets before any fiscal policy adopted by the GOVT. Both the companies have no interest obligations. Thus EBIT/Total assets ratio and Net before tax/ total assets ratio gives the same results. This is just not efficient performance of the management as they are not able to take the advantages of trading on equity. 5.2.5. Total assets / equity:Goyal and Welch (2007) argued that this ratio shows the extent to which equity in the business has been leveraged. This ratio is also known as financial leverage multiplier. High total assets/ equity denote higher chances of leveraging with equity, consequently higher financial risks associated with investments. On the other hands lower ratio shows lower chances of leverage with lower financial risks.Total assets / equity ratio of DBS in average is slightly greater than Indofood. This ratio is not very useful for measuring the performance. Risk averse investors are always prefer lower Total assets / equity ratio on the other hand the investors who are ready to take risk for higher returns always prefer high Total assets / equity ratio. This ratio is not relevant here as no company is using fixed interest bearing securities (French & Fama, 2007).5.2.6. Return on equity:Return on equity is a relationship between earning available to equity share holders and Equity investments. This ratio is highly relevant as it indicates return on the equity investment. Only in this case DBS performs better than Indo food ltds. Their return on equity is so higher than Indo food ltd. This ratio is a good tool for measuring the operating performance (Keown et al. 2008)..

Figure 5.2.6: Return on equity6.0. Valuation:6.1. Assumption:Beta coefficient denotes the changes in the securities return due to one percent changes in the market return (Adsera and Violas, 2008). That means it describes systematic risk of a security comparison to market portfolio. It is a quantitative measurement of securities sensitivity i.e. how much a particular security is deviated by changes in the market return.A number of methods are available to compute the beta coefficient. To compute the beta coefficient of DBS group the researcher decided to use regression method on the single index model (Baker and Wurgler, 2008). Under that method beta is represented through three ways.>1 Indicates that security return varies more than market return (Aggressive security). =1 Indicates return of particular security moves similarly with market return.