Stocks remain overvalued at floor price

Many companies were already at an elevated level on the Dhaka Stock Exchange when the regulator imposed the price movement restriction on all stocks in July 2022, staving off any correction of those securities.
For example, Monno Fabrics shot up on the DSE before the floor price was put in place. Then it slid down to the floor by September 2022 after some ups and downs. Unable to go further down, the stock of Monno Fabrics has remained stuck on the floor ever since, with a price-to-earnings ratio of more than 200.
The stock's correction was expected if its previous volatility on the stock exchange, financial performance, and dividend payouts were taken into consideration. But that did not happen because of the regulatory restriction.
Hence, the market value of Monno Fabrics has been much higher than what it is worth for so long, taking advantage of the minimum price set by the regulator. That is corroborated by the P/E ratio, which indicates the share price relative to the company's earnings per share.
There are many other companies whose abnormally high prices on the bourse have remained unchanged during the floor-price regime.
The small-cap companies have small numbers of free-float shares and they would have had corrections on the basis of financial performance if there were no floor price, said Managing Director of Midway Securities Md. Ashequr Rahman.
An investor can get an idea about a company's growth trajectory from the P/E ratio.
"If a company's P/E ratio is 15, an investor can expect that it will register a 15 per cent growth in the next two to three years," said Md. Moniruzzaman, managing director of Prime Bank Securities.
However, in some cases a company's P/E ratio can be high at the initial stage due to its high growth. The growth observed at the initial stage may not be sustained and then the high P/E ratio in the later period will not be rational, added Mr. Moniruzzaman.
Monno Fabrics reported EPS of Tk 0.06-Tk 0.12 for the last three fiscal years.
It distributed 1 per cent and 2 per cent cash dividends for FY23 and FY22 respectively. No information is given on the DSE website about the dividend distribution for the previous years.
Its auditor said the company could not show documents supporting its cash receivables and tax refundable from the government and that it had a shortfall in the dividend account.
At the floor price of Tk 237.7, the P/E ratio of Rahima Food Corporation is more than 228. It hit the floor on November 2, 2022 and has been languishing there even after reporting a 255 per cent year-on-year profit growth to Tk 20.56 million for FY23.
Rahim Textile Mills' P/E ratio is 291.25 on the floor, despite a decline in profit in FY22 and a loss in FY23.
There are nine more companies which exhibited a P/E ratio of 200-1,392 at the floor price.
Of them, Aman Cotton Fibrous incurred a loss in FY23, Golden Harvest Agro Industries in FY22, and IFAD Autos in FY23.
Mr. Rahman said a company might be considered underpriced or overpriced based on different metrics, such as cash flow, earnings per share (EPS), P/E ratio, and dividend payout ratio.
With high P/E ratios and low dividend payout ratios, many of these companies may be seen as overpriced.
But the stocks have not been through any corrections due to the floor price, whereas blue-chip stocks have failed to move above the floor because of the overall sentiment against the market, engendered by the regulatory move.

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