Does the share price for Dali Foods Group Company Limited (SEHK:3799) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for Dali Foods Group here.
What’s the value?
I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I use the analyst consensus forecast of 3799’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.38%. This resulted in a present value of 5-year cash flow of CN¥17,365.7M. Want to know how I calculated this value? Check out our detailed analysis here.
Above is a visual representation of how 3799’s top and bottom lines are expected to move in the future, which should give you an idea of 3799’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is CN¥58,440.0M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥75,805.8M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of HK$6.53, which, compared to the current share price of HK$6.1, we find that Dali Foods Group is about right, perhaps slightly undervalued at a 6.62% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For 3799, I’ve put together three relevant aspects you should further examine:
PS. Simply Wall St does a DCF calculation for every HK stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.