Question

Part A

You are a young finance professional who is pursuing his career into the equity market, after a long efforts he got the position in equity firm where initial job description is to pitch clients for long term investments into different sector of Pakistan Stock Market. After meeting two or three clients he decided to use the relative valuation approach in order provide a useful insight to clients and convince them for investments. He gather the data of few firms which are mentioned below in the exhibit 1

	FFBL	EFERT	FFC	ENGRO	AHCL	FATIMA
Current Market Price	21.40	66.49	111.00	303.50	43.50	28.80
EPS	(7.00)	9.50	14.36	16.86	2.09	6.82
Total Equities value (In mn)	2,626	45,111	37,682	86,209	15,486	80,971
No. of shares (In mn)	934	1,335	1,272	576	408	2,100
Expected growth of EPS	5.00%	7.00%	2.00%	3.00%	7.00%	5.00%
Expected growth of BV	2.00%	7.50%	3.50%	4.00%	5.50%	7.00%

Exhibit 1

Now find the intrinsic value based on the relative valuation approach by using the above statistics, however, you will use the 70% weight to PE and 30% weight to PB approach to find the expected intrinsic value, furthermore, he’ll only invest in company which produces the more than 15% of return.

Instructions:

Write down the brief report of at least 250 words with complete steps of your working.

Answer 1

Particulars	FFBL	EFERT	FFC	ENGRO	AHCL	FATIMA
Current Market Price	21.40	66.49	111.00	303.50	43.50	28.80
EPS	(7.00)	9.50	14.36	16.86	2.09	6.82
Expected EPS	(6.65)	10.17	14.65	17.37	2.24	7.16
P/E Ratio	(3.22)	6.54	7.58	17.47	19.42	4.02
BV per share	2.81	33.79	29.62	149.67	37.96	38.56
Expected BV per share	2.87	36.32	30.66	155.66	40.05	41.26
P/B Ratio	7.46	1.83	3.62	1.95	1.09	0.70
weighted IV[(0.7*P/E)+(0.30*P/B)]	(0.016)	5.127	6.392	12.814	13.921	3.024
ROE	-	28%	48.47%	11.26%	5.51%	17.68%

As the clients are supposed to invest in the firms which are having 15% more returns. So only EFERT, FFC, and FATIMA are the available options for investment. As per the intrinsic value basis, FFC has the highest worth.

Answer 2

Particulars	FFBL	EFERT	FFC	ENGRO	AHCL	FATIMA
Current Market Price	21.40	66.49	111.00	303.50	43.50	28.80
EPS	(7.00)	9.50	14.36	16.86	2.09	6.82
Expected EPS	(6.65)	10.17	14.65	17.37	2.24	7.16
P/E Ratio	(3.22)	6.54	7.58	17.47	19.42	4.02
BV per share	2.81	33.79	29.62	149.67	37.96	38.56
Expected BV per share	2.87	36.32	30.66	155.66	40.05	41.26
P/B Ratio	7.46	1.83	3.62	1.95	1.09	0.70
weighted IV[(0.7*P/E)+(0.30*P/B)]	(0.016)	5.127	6.392	12.814	13.921	3.024
ROE	-	28%	48.47%	11.26%	5.51%	17.68%

As the clients are supoosed to invest in the firms which are having 15% more returns. So only EFERT, FFC and FATIMA are the available options for investment. As per intrinsic value basis FFC has the highest worth.