May 17, 2004 Mohiuddin Ahmed (Course instructor) School of Business, Independent University, Baridhara, Dhaka.

Dear Sir, It is our immense pleasure to submit our class project on BOC Bangladesh Limited, as you asked to prepare and submit as a requirement of Finance 460 program. The name of our project is "Stock valuation of BOC Bangladesh Limited" We have tried our best to compile the pertinent information as comprehensively as possible and if you need any further information, we will be obliged to assist you. Thanking you, ..................... ACKNOWLEDGEMENTS At first we would like to thank our instructor for giving us such an important job like stock valuation as a class project. We would like to place our gratitude to the Supervisor of BOC Bangladesh Limited to enable us to complete our class project in their esteemed organization. Without his helpful guidance, the completion of this research project was unthinkable. Finally I would like to thank Hosne Ara Pervin Sheuli; Asst. Secretary Research & Library for helping in all sorts of collection of data. Her overwhelming support for this project gave us the inspiration to do a better report. EXECUTIVE SUMMARY This report Stock valuation of BOC Bangladesh Limited is prepared to fulfill the partial requirement of Finance 460 program of Business Administration Program of Independent University, Bangladesh. The topic of dissertation was selected upon consultation with course instructor of respective department. The main aim of this report is to find out the financial situation and valuation of the stock of BOC Bangladesh Ltd. From this analysis we have calculated the share price of BOC and this analysis from the annual report issued by BOC Bangladesh Ltd. from the year 1999 to 2003, which was the main source of information. After analyzing the different ratios of BOC Bangladesh Ltd. we can see that there was a slight decrement in Earning per Share and in 2003. Their EPS was 13.58, which is good for any company. From the analysis we can also say that BOC has failed to use its asset efficiently. In 2003 its earning per share has decreased slightly. This position has a bad impact on investors view. But according to chairmans statement the business results for the year were satisfactory. From the sources of information there is no industry average and because of that we cant compare those ratios. For this we cant actually say that those ratios were good or bad. To increase the performance of the company management had taken some new approaches. A second hand but unused Carbon Dioxide plant has been installed at the Tejgaon factory and has been accepted in late November after suitable testing.

Finally, we have used some qualitative factor and also some quantitative factor to find out the stock price. We have used DDM model as a quantitative factor. For this analysis we have taken imagination required rate of return (Kr), based on different types of risk associated with this company. A BRIEF HISTORY OF BOC BANGLADESH LIMITED BOC Bangladesh Limited is both an old and a relatively new company. Old because it has been present in what is now Bangladesh, in one form or the other, since the days of British India. New because it was registered under its own identity only in 1973. The Company began, after the independence of Bangladesh, with a modest turnover of a little over Tk.6 million. The turnover in 1999 exceeded Taka 1 billion. BOC Bangladesh Limited started out as Bangladesh Oxygen Limited with 3 small Oxygen plants and Dissolved Acetylene plants, one of each in Dhaka, Chittagong and Khu1na. In addition, it had an operating contract to run the Oxygen plants of Chittagong Steel Mills (CSM), which is still there today. For the manufacture of Welding Electrodes the Company had only one very small extruder. From inception, the Company had remained the sole supplier of Medical Oxygen in the Country. In the mid 70's a Nitrous Oxide plant still the only one in Bangladesh, was imported and installed in Dhaka to provide the nation with this vital anaesthetic gas. Later in the decade a Carbon Dioxide plant was bought and installed in Dhaka and this was the first in the Country to produce dry ice. In the early 80's the first liquid gas plant was imported from New Zealand and again installed in Dhaka, where the demand for Oxygen was concentrated. Shortly after that came the first boom in ship cutting and demand for Oxygen "went through the roof". The Company invested immediately in additional compressing capacity for the surplus Oxygen at CSM while simultaneously pursuing the Government to permit it to invest in new production capacity. Eventually the Company was permitted to import 400 cubic metres per hour air separation plant from Australia, capable of producing Liquid Oxygen, Nitrogen and, for the first time in Bangladesh, Agron. This was installed in Chittagong, essentially to feed the ship cutting market on the beach. In the early 90's booster was added to this to increase output, pending investment in further capacity. Meanwhile, the welding business of the Company was also growing fast and in the early 80's a state of the art RAM extruder was added to the production line, dramatically improving output and quality of electrodes. The Company, in another innovative move, invested in a wire drawing machine for the electrode factory. A second RAM was added in the late 80's to keep up with demand. The Company went "public" in 1985 when the Government renounced its right shares in favor of the public. Today, BOC Bangladesh is one of the premier companies in the Country. Bangladesh Oxygen Limited changed its name to BOC Bangladesh Limited in March 1995 in line with a world wide programme of the BOC Group. The 90's witnessed another change in the fortunes of the Company with deregulation and liberalisation of the economy. A site was specially purchased at Rupganj, near Dhaka, where the Company installed a 30 tonnes per day air separation plant, the largest in the country. The US made plant produces Oxygen, Nitrogen and Argon and is technologically, as advanced as any in the world. It came on stream in 1995. At the same time, the Company also invested in a modern integrated welding electrode plant, made by the largest welding electrode manufacturers in the world, which was imported and installed at the new site in Rupganj. A technical collaboration arrangement was also made with the suppliers ESAB AB of Sweden and the plant went into production in 1995. Welding business received ISO 9002 certification in the following year. A distribution agreement has been signed with world class Welding Company, The Lincoln Company of USA.

In March 1998 a second line of production was added to the integrated Welding Electrode Factory at Rupganj, doubling the capacity. Same year, in November 1998 a new site with a 20 TPD liquid plant was acquired in Shitalpur, Chittagong. The BOC Group, of which BOC Bangladesh Limited is a member, has its headquarters at Windlesham in the UK. It employs in excess of 40,000 people and contributes to the economies of nearly 60 countries world wide, with an annual turnover of E3.3 billion plus. Range of Products and Services Special Gases & Gas mixtures Gas Welding Rod & Flux Gas Welding and Cutting Equipment Any other gas on request Refrigerant Gases (Freon & Suva) Medical Gases Cylinders Anaesthesia Ventilators Anaesthesia Machines ICU/CCU Monitoring System ICU/CCU Ventilators Infusion/Syringe Pump Physiotherapy equipment Autoclave/Sterilizer Gynaecological Tables Medical Disposables Medical Equipment on request Compressed Oxygen Liquid Nitrogen Dissolved Acetylene Carbondioxide Compressed Helium Sulphurhexafluoride Sulphurdioxide Medical Oxygen Liquid Oxygen Compressed Nitrogen Sterilizing Gases Pulse Oximeter Nerve Stimulator Blood Gas Analyser Infant Warmer Infant Incubators Dry Ice Argon Lamp gases LPG Liquid Helium Hydrogen Entonox Nitrous Oxide OT Table OT Light Humidifier Nebulizer

Resuscitators Hemodialysis Photo therapy

Other Products (Materials) Mild Steel & Cast Iron Electrodes Low Hydrogen/Low Alloy Electrodes Stainless Steel & Bronze Electrodes Arc Welding Equipment & Accessories Spot Welding Machines MIG Welding Equipment & Accessories TIG Welding Equipment & Accessories Plasma Cutting Equipment & Accessories Welding Services & Training Welding Equipment Repair Origin of the Report This report is prepared to fulfill the partial requirement of Fin 460 of business administration program of Independent University on the stock valuation of a company. So the business organization BOC Bangladesh Limited is chosen and we are discussing on different aspects of this company and also of this industry over five years from 1999 to 2003. We did this report on financial performance because its a requirement of Finance course. We have tried to reflect our experience on our report in terms of stock valuation of BOC Bangladesh Limited. Objective of the Report The specific objectives aimed for this report is: 1. To fulfill the partial requirement of the course under the guidance of course coordinator. 2. To gain experience and knowledge of analyzing the economy from the real life, this will help us in the practical working environment. 3. To find out the financial situation of BOC Bangladesh Limited. 4. Identify macroeconomic environment. 5. Forecast the value of the stock of BOC Bangladesh Limited. Research Methodology Information used to prepare this report has been collected from both the Secondary source and the primary survey. The secondary sources of information were collected from BOC Bangladesh Limited, Dhaka Stock Exchange, Annual report of BOC Bangladesh Limited, periodicals and materials from various newspapers and articles and also different websites. An open discussion method was followed to gather primary information by interviewing the company secretary of the company. Limitations of the Study Lack of availability of information and data, some time there are some back dated information they provide The record system of the annual report is not efficient Lack of access in many section of the organization Time is not sufficient to complete the study perfectly.

Overall Economy Analysis Bangladesh is an agricultural country. With some three-fifths of the population engaged in farming. Jute and tea are principal sources of foreign exchange. Other important agricultural products are wheat, pulses (leguminous plants, such as peas, beans, and lentils), sweet potatoes, oilseeds of various kinds, sugarcane, tobacco, and fruits such as bananas, mangoes, and pineapples. The country is the world's largest exporter of jute and jute goods. Tea is also one of the major foreign exchange earners. Bangladesh also exports frozen shrimps, frog legs and handicrafts. There has also been a rapid growth in manufacturing industries, which offer a wide range of exportable goods such as leather goods and ready-made garments. Within the last few years' remittances from Bangladeshis employed abroad have contributed largely toward foreign exchange earnings. The prevailing political and economic stability has greatly encouraged investment in the private sector. For higher GDP growth, investments in both public and private sectors will need to be accelerated. The trend of foreign direct investment is very encouraging. Current economic highlights Industrial production growth has averaged more than 6% over the last 5 years. The export sector has been the engine of industrial growth, with ready-made garments leading the way, having grown at an average of 30% over the last 5 years. Global output and trade growth rates are expected to reach 4.1% and 5.5% in 2004 respectively. The industry sector attained 7.3 percent growth in FY03, against 6.5 percent in FY02. The manufacturing subsector displayed a healthy gain in growth, spurred by the growth in exports and imports. The services sector grew by 5.8 percent, against 5.4 percent in FY02. The Gross Domestic Product (GDP) of Bangladesh in FY03 at current market prices was Taka 3,004.9 billion against Taka 2,732.0 billion in FY02, indicating a nominal 10.0 percent growth in FY03 against 7.8 percent growth in FY02. On a constant price basis, the real GDP also recorded a higher growth rate of 5.3 percent in FY03 against 4.4 percent in FY02. Per capita GDP increased in FY03 to Taka 22,523 and Taka 17,784 in nominal and real terms respectively, from Taka 20,754 and Taka 17,112 in FY02. Revenue collection increased by Tk 509.6 crores or 27.88 percent to Tk.2337.2 crores during March, 2004. Per Capita GNI at current prices, in Taka 23578. Per Capita GDP at current prices, in Taka 22525. Net National Income at current prices, in million Taka 2905516. Export receipts of January, 2004 amounted to US$ 730.3 million which is higher by US$ 161.3 million or 28.35 percent compared to receipts of January, 2003. Import payments in December, 2003 amounted to US$ 875.9 million which is higher by US$ 78.2 million or 9.80 percent compared to December, 2002. Here we can see that the increasing rate of export is higher than import, which is a positive economic indicator. Foreign exchange reserves at the end of March,2004 were higher by US$ 880.3 million or 49.64 percent as against US$ 1773.2 million at the end March,2003. The annual rate of inflation increased to 5.51 percent at the end of January,2004 from 4.38 percent at the end of June,2003. The rate of inflation on point - to - point basis increased to 5.96 percent at the end of January,2004 from 5.03 percent at the end of June,2003. During July,2003- February,2004 workers' remittances increased by US$ 220.0 million or 11.16 percent to US$ 2191.44 million as compared to US$ 1971.46 million during July,2002- February,2003.

Economic outlook for FY2004 Riding on a sustained recovery in exports, persistent strength in remittance inflows and rising domestic demand, Bangladesh economy is well on its way to achieve projected 5.5 percent GDP growth inFY2004. The economic growth continues to pick up as all the leading indicators show positive trend in this fiscal year. Revenue collection and slow implementation of the development budget remain the sore points in the economy which otherwise had an excellent time till April. The quarterly update said inflation is now on decline, grain harvest have grown strongly, industrial production index increased by 5.2% till November 2003. Strong growth in export and import also mean that trade service growth would improve. Thus, the projected 5.5% GDP growth for FY04 is very likely to be achieved. Rebound in Bangladeshs export performance, which started in February 2003, has continued. Export earnings during the first seven moths of FY04 increased by 16.2 percent relative to earnings in the corresponding period of the previous year. Net crop production for FY04 is estimated at 25.3 million tons, about 4.1% higher than last year. Manufacturing growth also appears to have been quite healthy. The medium and large scale industrial production index has increased by 5.2% in November 2003, compared to only 2% growth in November 2002. The exchange market was further liberalized in December 2003 with the removal of L/C margin requirements. The exchange rate is estimated to have depreciated by 5 percent in real and nominal terms since the float in May 2003. Growth of remittances from Bangladeshis abroad has rebounded in recent months. Remittances in the first eight months of the current fiscal year increased by 11.2 percent relative to the corresponding period of the previous year. In summary, all of these indicators show a positive attitude toward the economy of Bangladesh. So from this economy analysis we can easily say that in the near future Bangladesh will be a perfect place for investment. Capital market outlook Market capitalization at DSE on 30, 2003 amounted to Tk97.44b ($1,680m), which is only 3.24% of GDP, against last years Tk68.68b. Three major groups of listed companies, i.e. banks, pharmaceuticals & chemicals, and food & allied products together constitute about 60% of the total market capitalization, while textile sector has the largest number of listed companies at 44. The secondary market was hibernating from the beginning of the year. DSE recorded an average turnover of Tk2924m per month in 2002, which after reaching a high of Tk5187m in August started to slide at a rate of 30% per month that continued till February 2003, when the market took a sharp upturn. Afterwards the rise was sporadic, and in June turnover reached over Tk2282m only to be sloped again. Industry Analysis Attractively high margin and growth We have considered oxygen with other gases and welding electrodes under the sector. Sale of oxygen grew by around 20% and electrodes by 17% annually during 1999-2003. The gas is mainly used in ship-breaking which is a major supplier of steel in the country. Nitrogen is used for industrial purpose in creating superchilling temperature. Business of oxygen and nitrogen enjoys wide gross margin, as natural air is the main

raw material for those gases. This is so for manufacturing of electrodes also. BOC, the market leader in selling gases and electrodes, generated a healthy profit of 206,692 million Tk in the year 2003. Demand for medical oxygen is increasing Ship-breaking business is the major consumer of industrial oxygen. Demand for medical gases including oxygen is consistently increasing. However in the industrial sector, demand depends upon performance of ship-breaking industry. This year sale of oxygen is likely to be hampered as government has liquidated Chittagong Steel Mills. Increasing prospects from a wider perspective As the country is not optimally industrialized, it has opportunities for a large number of small and medium sized steel-fabricating and repairing units to support the growing base. This, together with rapid urbanization will be increasing the demand for steel works and thereby industrial oxygen and electrodes. Therefore, we expect that the sector will keep growth tempo in the long run. Dominated by BOC The business is capital-intensive and requires advanced technological equipment and expertise barring new entrants. Also, in the marketing front, BOC is highly aggressive and a giant. Therefore, it is difficult for any other company to emerge in this line. BOC is holding near about 50% market share in fuel & power sector. There are not so many companies in fuel & power sector in Bangladesh. There are only 5 companies in this business. These companies are BOC Bangladesh Ltd., Bangladesh Welding electrodes, National oxygen, Chittagong Oxygen, Hatim Oxygen.

Major Market Cap of overall industry Bank sector is holding the first position with 32% in major market cap but in this section there are 26 companies. On the other hand fuel & power is capturing near about 4% of market cap and there are only 5 companies. This position also indicates the positive sign for investment in fuel & power sector.

FUEL & POWER SECTOR

Price

No. of share

Face value

Share Capital (mln)

Net profit after Tax (mln) 209.05 1.27 (73.50)

NAV per share (mln) 68.84 13.87 (425.02)

EPS

Div per share

P/E

Price/ NAV per share (mln) 2.12 .40 -

Yield

Market Cap Tk (mln)

BOC Bd. Ltd. Bd. Welding National Ox.

146.20 5.50 21

15218280 10400000 140000

10 10 100

152 104 14

13.44 .12 (525.02)

20 -

10.64 45.14 -

6.84 1.60 -

3463.82 53.04 3.75

(Source: Monthly Review Dec, 2003)

For any kind of industry analysis, it is very important to have the data of all companies in that sector. But in case of Fuel & power all of the companies are not listed in DSE, so that we have fall in a difficult position to compare the fuel sector with overall market. If we think of investing in fuel sector, it will be very clever to invest in BOC Bangladesh. From the performance table we can easily say that BOC should be the first choice for investment. The market cap for BOC is 3463.82 mln Tk and leading the first position in fuel & power sector. On the other hand Bangladesh welding electrodes leads in second position with market cap of 53.04 mln Tk.

An over view discussion from an investors point of view Investors who buy shares in a company want to be able to compare the benefit from the investment with the amount they have paid, or intend to pay, for their shares. There are two measures of benefit to the investors. One is the profit of the period. The other is the dividend which is an amount actually paid to the shareholders. Profit indicates wealth created by the business. That wealth may accumulate in the business or else part of it may be paid out in the form of dividend. There are some ratios, which may consider by the investor. They are as follows: 1. 2. 3. 4. 5. 6. Net profit margin Return on asset Return on equity Earning per share Dividend per share Asset per share

All of these ratios are related to profitability dimension. An investor wants to invest his money on those organizations, which are profitable for him. So he might give more emphasize on profitability dimension rather than other ratios. So, above ratios might give him a clear view of the company; whether it is profitable or not. By the following ratio we will justify BOC Bangladesh Ltd. from an investors point of view.

2003 Ratio 16.02% Net profit margin 11.74% Return on total asset 16.48% Return on total equity 13.58 Tk Earnings per Share (EPS) 20.00 Tk Dividend per share 82.37 Tk Asset per share

2002

2001

2000

1999

16.23%

17.23%

19.42%

14.30%

12.46%

12.18%

12.46%

10.40%

17.43%

18.46%

21.19%

17.89%

13.74 Tk

13.27 Tk

13.36 Tk

9.60 Tk

10.00 Tk

4.40 Tk

3.99 Tk

3.99 Tk

78.79 Tk

71.91 Tk

63.04 Tk

53.68 Tk

From the above ratio we see that except Dividend per share and Asset per share all of profitability ratios have gone down in the year 2003 from the year 2002. In 2003 sales has not increased in its average rate. On the other hand all of expenses have increased at a higher rate. As a result all of ratio has decreased and it has created a bad impact on investors. Here we also see that the cash and bank has increased about 4.20 times than 2002. It means the company is holding idle cash. And the investors never like this types of situation. In 2003 account receivable has also increased significantly. From this we can say that management has failed to manage all sorts of expenses as well as its assets. Here one thing is important that every type of ratios under profitability dimension has continuously increased till the year 2000. So definitely a question arises. What is the problem for decreasing the ratio in 2001-2003?

According to chairmans statement the company has faced some sorts of problem during 2001. Difficulties were faced at almost every level of activity from clearing of goods at ports, movement of goods and personnel, and to marketing of products due to frequent closures caused by hartals and other political activities. The activities of the Company had also to face deterioration in the law and order situation. And finally due to the event of September 11 in the year 2001 in the United States of America, the company has faced a big problem because it has mostly destroyed the world economy. Despite all these, the Company had been able to keep up its progress. In spite of all the above-mentioned factors a decent growth in the business of this Company was achieved last year. Profits available for distribution did not reflect this growth because of higher incidence of interest and tax, as expected. Moderate capital expenditure and good working capital management were able to bring down the level of borrowing. The turnover of the company increased over the previous year by about .12%. Though there was virtually no increase in the profits available for appropriation in the year, the directors recommends a dividend of Taka 20 per each share of Taka 10 that is 200%. Asset per share is also increasing day by day. We must concentrate on shareholders equity to understand the current position of the company in the market. The equity was 642,973,000 Taka in 1996 and it has increased to 125,35,83,000 Taka in 2003. To make a clear view of shareholders equity we can show a graph with 5 years data. From this graph we can realize that how rapidly equity is increasing. An investor could be interested by seeing this graph because it shows a healthy position of the company in the competitive market. And finally we must give a close eye to the development strategy of BOC Bangladesh Ltd. In March 1998 a second line of production was added to the integrated Welding Electrode Factory at Rupganj, doubling the capacity. Same year, in November 1998 a new site with a 20 TPD liquid plant was acquired in Shitalpur, Chittagong. In November 2000 a second hand but unused carbon dioxide plant has been installed at the Tejgaon factory and has been accepted after suitable testing. By analyzing all sorts of discussion an investor might be interested to invest his money in this organization. Though the company has suffered some problem in the year 2003 but they have a continuous growth in market. And we hope that the company will overcome those problems and will be back with its own position.

Investors decision based on intrinsic value of the stock using the Dividend Discount Model The required rate of return (K) is estimated as 15% 1. The risk free rate of return is estimated to be 8% The risk free rate of return is estimated using the average of the returns from different government securities ranging in maturities from 2 years to 5 years. It should be noted that the rate of returns on that securities varies from 7% to 9%. So, that we have taken 8% as risk free rate. 2. The risk premium is estimated as 7% To estimate the risk premium we have measured 5 sources of uncertainty and from that analysis we have calculated the risk premium. From 5 years data, we have seen that the sales of this company have increased continuously but there are some problems in their profit margin. It has decreased over some years. So, business risk is estimated as 1.25%. The current liability has increased significantly in the year 2003 from the year 2002. So that, it must absorb some financial risk and it is estimated as 2%.

In the recent time, the average number of trade of the share of this company is more than 11,000, which stands in a satisfactory level. Thus liquidity risk is estimated as 1%. Different types of Chemicals and lubricants are imported from foreign countries. Bangladeshi currency is very much volatile against dollar value, so exchange rate risk is estimated as 1% The political risk in Bangladesh is very high. Every time there are different types of strikes are held in this country. So, country risk is estimated as 1.75% After adding all of these components such as, risk free rate adjusted inflation rate and risk premium we can get our required rate of return as 15%. The growth is estimated as 6.45% In case of calculating growth, we have used the average result of two methods. In the first method we use RR and ROE for calculating growth (RRROE = g). On the other hand, in the second method we have calculated the growth through the help of sales and the formula that we use is Fv = PV (1+g) n. Method 1: RRROE = g: 6.92% Year 1999 2000 2001 2002 2003 Average The retention rate and Return on equity were calculated from the balance sheets. Method 2: FV = PV (1+g) n: g = 5.98% Here, FV = Sale, Year 2003 PV = Sale, Year 1999 N = 4 (Year1999 to Year 2003) 1289431= 1021890 (1+g) 4 g = .0598 Retention Rate (RR) .5844 .7014 .6684 .2722 (.4727) ROE .1789 .2119 .1846 .1743 .1648 g = (RRROE) .1045 .1486 .1233 .0474 (.0779) .0692

Average from method 1 and method 2 = (.0692+.0598) 2 = .0645 or 6.45%

D2003 = 20 K g = 15% = 6.45%

Intrinsic value of share = D2004 (k g) D2003 (1 + g) (k g) 20 (1 + .0645) (.15 - .0645)

249.00 Market price of share of BOC Bangladesh Ltd. as on May 16, 2004 is Tk. 144.97 Our Intrinsic value according to DDM model is 249.00

After the analysis of BOC Bangladesh Ltd., we recommend to purchase the share of this company.
JUSTIFICATION BOC Bangladesh Ltd. is the market leader in fuel and power market in Bangladesh. High probability of increased profit and earning in the coming year. Asset per share is increasing day by day, thus there is no chance for default. They are giving high rate of dividend, as example they proposed 200% dividend per share in the year 2003. They are always introducing new product, so that it become easy for them to capture the local market. The management of BOC Bangladesh Ltd. is having great quality, who has the ability to face critical situation. Three of the directors are from foreign countries. BOC products play a vital role in applications as diverse as purifying water, producing microchips, treating hospital patients and manufacturing cars. Every year BOC is awarded around 90 patents for new, innovative processes. BOC has manufacturing operations in about 50 countries and sales in many others. The competitors of BOC are very weak compared to its business. They are increasing their product portfolio and also introducing new manufacturing plant. Last but not the least; our estimated market value is more than of its current market price.