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

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, 2011
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2. April 13, 2011
Rakibul Hasan
Course Instructor
ACT 330
North South University
Subject: Submission of the final project of ACT 330
Dear Sir,
Here is the final project for the course ACT 330. The report is on the company named
Heidelberg 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 information
it contains, please do not hesitate to contact us at fazophobia@hotmail.com or
solar.stone@hotmail.com. We look forward to hearing from you soon.
Sincerely yours,
_______________ _________________
Faiyaz Hossain Fahim Ahmed
Id: 081 046 030 Id: 081 247 030
____________________ ________________
Nazib Haider Chowdhury Md. Sayeed
Id: 081 703 030 Id: 081 729 530
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3. TABLE OF CONTENTS
INTRODUCTION .............................................................................................................. 1
DISCLOSURE .................................................................................................................. 6
SHARES ............................................................................................................................ 9
RATIOS & ANALYSIS .................................................................................................. 11
DIVIDEND POLICY ....................................................................................................... 15
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4. INTRODUCTION
Heidelberg Cement Bangladesh Limited meets 13% of the Bangladesh demand for cement
from two plants located at Dhaka & Chittagong. Heidelberg Cement Bangladesh Limited
employs 260 people across the country. The company with 1.5 million tones annual cement
production has become a major force in the Bangladesh Cement industry over the last eight
years Through acquisition of Chittagong Cement Clinker Grinding Company Ltd., it has
brought together regional manufacturing whose history stretches back to the very beginning
of commercial cement production in Bangladesh. In Bangladesh, Heidelberg group is one of
the largest foreign investors having an investment of 100 million US$ with more than 260
employees 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 the
wider community, the company is able to maintain its position of strength as a sustainable
cement provider without compromising commitment to long term stability and environmental
responsibility. Heidelberg Cement Bangladesh Limited is a sister concern of Heidelberg
Cement Group.
Products
As part of its relentless pursuit for innovation and constant drive to improve quality,
Heidelberg Cement has introduced Portland Composite Cement, Scan Cement and
Heidelberg Cement. Absorbing European Norms in cement producing made Heidelberg
Cement Bangladesh Ltd. the pioneer in this sector. Now-a-days all the cement factories of
Bangladesh are producing cement as per European Norm. The category Portland Composite
Cement (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 to
calculate and fully analyze the results. The readily available information through the internet
makes Heidelberg a lucrative company to do this project on; since most of the required
information is readily available in their website which is also very systematic. These
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5. favorable conditions made Heidelberg Cement Bangladesh Limited a very reliable company
to do our project on.
Scope and Objective of the Study
For more in-depth knowledge about Heidelberg Cement Bangladesh Limited’s performance
and dividend policy, we will have to conduct relevant ratio analysis with the help of the data
presented 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 Study
We had come across a few problems while trying to get as precise data as possible from our
attempt. 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.
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6. DISCLOSURE
The notes that are disclosed in the financial statement of Heidelberg Cement Limited
Bangladesh 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.
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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.
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8.  The credit terms of the company
The notes give a better insight about how the company is handling its financial issues. For
example, seeing the notes we can deduce what assets the company holds, what assets it has
leased and what assets were sold or bought. This extra information gives investors a better
picture of the company’s operations and becomes the deciding factor when an investor wants
to invest.
Effective management of the risks and opportunities associated with significant social, ethical
and environmental issues is an important component of good governance practice.
Companies that ignore such risks may suffer serious damage to their reputation and brand
value, as well as litigation and operational risks. Creating a “governance culture” of
transparency and accountability that goes beyond mere compliance with codes and legislation
is key to addressing these aspects of performance effectively. Well-known scandals illustrate
just how important it is for companies to be alert to the business risks inherent in a broad
range of issues, such as fraud, bribery and corruption, insider trading, climate change, human
rights, 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 annual
report and in their official website. Heidelberg Cement Bangladesh Limited has also engaged
itself in hordes of CSR activities such as Food Relief, setting up Medical Camps, arranging
donations for Land Slide victims etc. It is crucial that a company should disclose these sort of
issues since it builds on the goodwill of the company and it is reflected in their rising share
prices.
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9. SHARES
Heidelberg Cement Bangladesh Limited has issued only common shares. The par value of the
issued shares is tk100. the strength of a company in order to issue new shares is reflected by
its profitability. Heidelberg Cement Bangladesh Limited has shown a steady consistent
profitability which shows that if the company wants it can issue new shares. However, before
considering issuing new shares, Heidelberg Cement Bangladesh Limited should weigh seek is
there any other debt financing with a low interest rate.
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11. RATIOS & ANALYSIS
The most significant item in the cash flow under investing and financing items were
purchase of fixed assets and short term loan received, respectively. This reflects Heidelberg
Cement Bangladesh Limited was focusing on expanding their business by increasing their
output.
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 0.01
The 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 has
more current assets to cover its current liabilities. It can also be inferred that Heidelberg’s
working capital finally became positive in 2007, possibly allowing the company to use the
amount in various long-term asset financing schemes. However, the quick ratio paints a
different picture. A quick ratio of 1 is ideally preferable, indicating that a significant portion
of Heidelberg’s current assets is tied up in slow-moving inventories.
The current cash debt coverage ratio measures whether a company can cover its current
financial obligations during a fiscal year from cash generated in operations. Heidelberg’s
current cash debt ratio has improved by about 1140% in 2006, with it remaining steady in
2007. In 2008 Heidelberg incurred large expenses in paying off its suppliers, leading to very
low value of 0.01. Nevertheless, in the five year period current cash debt coverage was never
above 1, meaning that Heidelberg is unable to pay off its current liabilities from its
operations.
Overall, the liquidity position is mixed. While not worrying, Heidelberg should closely
monitor its dropping quick ratio and cash debt coverage ratio.
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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 1.08
Heidelberg has a receivables turnover of 9.61 over the 2004 – 2008 period, with 2008 being
the highest. This means the company is able, on average, to quickly and efficiently collect its
outstanding receivables 9.61 times a year, which shows good liquidity position. The company
has had a stable inventory turnover from 2004 to 2007 (averaging 5.66), but this dropped to
3.54 in 2008 mainly due to Heidelberg increasing its inventory by 114.88%. This looks to be
a 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 its
assets to generate sales, breaking even in 2006 and maintaining the one-to-one sales/asset
activity rate.
Liquidity and activity wise, Heidelberg is currently in a stable. However, they should take
note of their low inventory turnover in 2008 and be careful of not ending up with a large
inventory policy that may incur excessive carrying costs in the form of storage, investment,
obsolescence etc.
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13. Profitability
RATIO FORMULA 2004 2005 2006 2007 2008
Net 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 96.92 110.00 104.86
Like previous economic indicators, Heidelberg’s profit margin has show steady growth over
the 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 to
2008 at average of 21%. It should be noted that historically, the rate of return on total assets
has 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 the
equity. Trading on the equity refers to the practice of borrowing funds at fixed interest rates
or issuing preferred stock with constant dividend rates; preferably rates that are lower than
the rate of return obtained on assets. If this can be done, the money obtained from
bondholders (or preferred shareholders) earns enough to pay the interest (or preferred
dividends) and to leave some margin for the common shareholders, earning them extra
revenue. Since Heidelberg’s ROE has always been higher than its ROA, it is unable to take
advantage of trading in the equity. This also explains why Heidelberg has not issued
preferred shares, as it would prove unprofitable.
The dividend payout ratio has steadily increased, being highest in 2008 at 0.31. The
increasing trend of the ratio should leave Heidelberg investors satisfied on the good yield on
the stock. Earnings per share has also increased over 2004-2008. Earnings was highest in
2007 at 110, this fell slightly by 4 points in 2008.
Overall, Heidelberg’s profitability position has strengthened over time. All indicators show
positive growth, indicating that the company is pursuing the right strategy in terms of using
its assets to create revenue.
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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 1.00
Times interest earned EBIT/Interest
ratio 0.42 2.07 6.77 12.87 11.26
From 2004 to 2008, Heidelberg has gotten better at financing its total asset needs with fewer
liabilities, 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 generated
from its operations – Heidelberg is able to meet 56% of its total liabilities with cash from
operating 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 maintained
that value through 2007 and 2008.
Looking at the times-interest earned ratio, we see a positive growth trend. This signifies that
Heidelberg have gotten better at being able to cover its mandatory interest payments with
operating 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 covering
its financial obligations with its assets and revenue sources.
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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 2008
Number of shares oustanding 4,181,270 4,892,086 5,381,294 5,650,358 5,650,358
Capital 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 0
Cash dividend (proposed) 0 48,921,000 86,101,000 141,259,000 186,462,000
Total 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.
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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
company's 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 2008
Dividend 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 company's 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 company's
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
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