In this article I am going to calculate the intrinsic value of NetLink NBN Trust (SGX:CJLU) using the discounted cash flows (DCF) model. 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 March 2018 so be sure check the latest calculation for NetLink NBN Trust here.

Crunching the numbers

I’ve used the 2-stage growth 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. Firstly, I use the analyst consensus estimates of CJLU’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.38%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of S$566.58M. Keen to know how I calculated this value? Read our detailed analysis here.

In the visual above, we see how how CJLU’s earnings are expected to move going forward, which should give you an idea of CJLU’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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 S$2.80B.

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is S$3.36B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of SGD0.86, which, compared to the current share price of SGD0.815, we see that NetLink NBN Trust is about right, perhaps slightly undervalued at a 5.59% discount to what it is available for right now.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.

For CJLU, I’ve compiled three relevant aspects you should look at:

1. Financial Health: Does CJLU have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

2. Future Earnings: How does CJLU’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CJLU? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!