An Intrinsic Calculation For Sembcorp Industries Ltd (SGX:U96) Shows It’s 39.02% Undervalued
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Does the share price for Sembcorp Industries Ltd (SGX:U96) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not October 2018 then I highly recommend you check out the latest calculation for Sembcorp Industries by following the link below.
Check out our latest analysis for Sembcorp Industries
The calculation
I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow estimate
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (SGD, Millions) | SGD675.00 | SGD823.00 | SGD775.35 | SGD730.46 | SGD688.16 |
| Source | Analyst x2 | Analyst x2 | Est @ -5.79% | Est @ -5.79% | Est @ -5.79% |
| Present Value Discounted @ 9.79% | SGD614.79 | SGD682.72 | SGD585.81 | SGD502.66 | SGD431.31 |
Present Value of 5-year Cash Flow (PVCF)= S$2.82b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.6%. We discount this to today’s value at a cost of equity of 9.8%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = S$688.2m × (1 + 2.6%) ÷ (9.8% – 2.6%) = S$9.76b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = S$9.76b ÷ ( 1 + 9.8%)5 = S$6.11b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is S$8.93b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of SGD5. Compared to the current share price of SGD3.05, the stock is quite undervalued at a 39.0% discount to what it is available for right now.