TECHNICAL ANALYSIS
Trend line approach
the pattern forms a wave like line. Therefore the price will tend to range between ksh 33 to ksh
47. This is because these are the ranges in which the share prices fall. Therefore it is not
advisable to buy or sell Bamburi cement shares because the price range is minimal.
Chart pattern analysis
Using the chart above, the pattern of Bamburi Cement price shares is relatively unpredictable
since the curve depicts that prices rise and fall after a short period of time. Therefore it would not
be advisable to buy the shares.
Price channel approach
A price channel forms when a security's price is buffeted by the forces of supply and demand,
and can be upward, downward, or sideways trending. These forces affect the price of a security
and can cause it to create a prolonged price channel. The dominance of one force determines the
price channel’s trending direction. Price channels can occur over various time frames. They can
be created by all types of instruments and securities, including futures, stocks, mutual funds,
exchange-traded funds (ETFs), and more.
Potentially, there are a few ways to benefit from correctly identifying price channels. Investors,
using both long positions and short positions, have the greatest opportunity to gain when security
follows a delineated price channel path.
Using the chart above, the channel tends to be horizontal since the line is almost straight because
the bends take an almost immediate curve.
Candlestick analysis
Just like a bar chart, a daily candlestick shows the market's open, high, low, and close price for
the day. The candlestick has a wide part, which is called the "real body."
This real body represents the price range between the open and close of that day's trading. When
the real body is filled in or black, it means the close was lower than the open. If the real body is
empty, it means the close was higher than the open.
Here, using the current candlestick, the market opens at a price of ksh 38.00, the highest price is
ksh 38.10, and the lowest price is 37.00 while the closing price is 37.95. It is therefore not
appropriate to sell since there is a price drop as depicted by the Closing price.
FUNDAMENTAL ANALYSIS
The Business Model Analysis
Bamburi cement implements a circular and resource-optimized business model which works to
optimize its use of natural resources by managing its environmental footprint effectively and
creating value where possible by using recycled materials or incorporating other actors in the
management of common watershed basins.
However, this cannot form an economic basis for determining whether to buy and sell shares at
Bamburi Cement although in may influence due to stakeholder concerns.
The Dividend Discount Model (DDM)
This is a quantitative method used for predicting the price of a company's stock based on the
theory that its present-day price is worth the sum of all of its future dividend payments when
discounted back to their present value. It attempts to calculate the fair value of a stock
irrespective of the prevailing market conditions and takes into consideration the dividend payout
factors and the market expected returns.
If the value obtained from the DDM is higher than the current trading price of shares, then the
stock is undervalued and qualifies for a buy, and vice versa. Dividend discount model assumes
zero growth in the dividend, in which case the value of the stock is the value of the dividend
divided by the expected rate of return.
A company produces goods or offers services to earn profits. The cash flow earned from such
business activities determines its profits, which gets reflected in the company’s stock prices.
Companies also make dividend payments to stockholders, which usually originates from
business profits. The DDM model is based on the theory that the value of a company is the
present worth of the sum of all of its future dividend payments.
𝐷𝐷𝑀 =
𝐸𝐷𝑃𝑆
(𝐶𝐶𝐸−𝐷𝐺𝑅)
Where: EDPS – Expected Dividend Per Share
CCE – Cost of Capital Equity
DGR – Dividend growth rate
=
1.98
0.00521−0.0109
Ksh 48.06
Discounted cash flow (DCF)
This is a model used to estimate the value of an investment based on its expected future cash
flows. DCF analysis attempts to figure out the value of an investment today, based on projections
of how much money it will generate in the future. This applies to the decisions of investors in
companies or securities, such as acquiring a company or buying a stock, and for business owners
and managers looking to make capital budgeting or operating expenditures decisions.
𝐷𝐶𝐹 =
=
=
𝐶𝐹1
(1+𝑟)
835
(1+0.072)
780,220,000,
362,959,275
Ksh 2.15
The purpose of DCF analysis is to estimate the money an investor would receive from an
investment, adjusted for the time value of money. The time value of money assumes that a
shilling today is worth more than a shilling tomorrow because it can be invested. As such, a DCF
analysis is appropriate in any situation wherein a person is paying money in the present with
expectations of receiving more money in the future.
Residual Income Model
The underlying idea is that investors require a rate of return from their resources – i.e. equity –
under the control of the firm's management, compensating them for their opportunity cost and
accounting for the level of risk resulting. This rate of return is the cost of equity, and a formal
equity cost must be subtracted from net income. Consequently, to create shareholder value,
management must generate returns at least as great as this cost. Thus, although a company may
report a profit on its income statement, it may actually be economically unprofitable.
It is thus possible that a value deemed positive using a traditional discounted cash flow (DCF)
approach may be negative here. RI-based valuation is therefore a valuable complement to more
traditional techniques. The residual income is calculated as follows:
Equity Charge = Equity Capital x Cost of Equity
Residual income = Net Income − Equity Charge.
Equity charge is simply a firm's total equity capital multiplied by the required rate of return of
that equity, and can be estimated using the capital asset pricing model.
Using the residual income approach, the value of a company's stock can be calculated as the sum
of its book value and the present value of its expected future residual income, discounted at the
cost of equity, r, resulting in the general formula:
𝑃𝑜 = 𝐵𝑂
+ ∑∞
𝑡=1
𝑅𝐼𝑡
(1+𝑟)
= 1.84 + ∑
1.98−0.0521(2.30)
1+0.0521
Ksh 3.61
Generally, the shares of Bamburi Cement are undervalued, since the Market price is lower than
the intrinsic value of the share price. Also the dividends paid of ksh 1.86 is lower compared to
the value of the share calculated using the Models above.