Calculating The Intrinsic Value Of Southern Packaging Group Limited (SGX:BQP)

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editorial-team@simplywallst.com (Simply Wall St)

Thu, Jan 23, 2025, 7:27 PM 6 min read

In this article we are going to estimate the intrinsic value of Southern Packaging Group Limited (SGX:BQP) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Southern Packaging Group

Is Southern Packaging Group Fairly Valued?

We're 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 a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥13.5m	CN¥13.8m	CN¥14.1m	CN¥14.4m	CN¥14.7m	CN¥15.0m	CN¥15.3m	CN¥15.7m	CN¥16.0m	CN¥16.4m
Growth Rate Estimate Source	Est @ 2.10%	Est @ 2.14%	Est @ 2.16%	Est @ 2.17%	Est @ 2.18%	Est @ 2.19%	Est @ 2.20%	Est @ 2.20%	Est @ 2.20%	Est @ 2.21%
Present Value (CN¥, Millions) Discounted @ 10%	CN¥12.2	CN¥11.3	CN¥10.4	CN¥9.6	CN¥8.9	CN¥8.3	CN¥7.6	CN¥7.1	CN¥6.5	CN¥6.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥88m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 10%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥16m× (1 + 2.2%) ÷ (10%– 2.2%) = CN¥203m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥203m÷ ( 1 + 10%)¹⁰= CN¥75m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥163m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of S$0.4, the company appears about fair value at a 12% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — SGX:BQP Discounted Cash Flow January 24th 2025

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Southern Packaging Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 10%, which is based on a levered beta of 1.654. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Southern Packaging Group

Strength

No major strengths identified for BQP.

Weakness

Interest payments on debt are not well covered.

Opportunity

Has sufficient cash runway for more than 3 years based on current free cash flows.

Current share price is below our estimate of fair value.

Lack of analyst coverage makes it difficult to determine BQP's earnings prospects.

Threat

Debt is not well covered by operating cash flow.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Southern Packaging Group, there are three additional aspects you should assess:

Risks: Every company has them, and we've spotted 4 warning signs for Southern Packaging Group (of which 3 shouldn't be ignored!) you should know about.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SGX every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.