COSCO SHIPPING International (Singapore)'s estimated fair value is S$0.12 based on 2 Stage Free Cash Flow to Equity
Current share price of S$0.15 suggests COSCO SHIPPING International (Singapore) is potentially trading close to its fair value
COSCO SHIPPING International (Singapore)'s peers are currently trading at a discount of 28% on average
In this article we are going to estimate the intrinsic value of COSCO SHIPPING International (Singapore) Co., Ltd. (SGX:F83) by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for COSCO SHIPPING International (Singapore)
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (SGD, Millions)
S$23.6m
S$22.1m
S$21.2m
S$20.8m
S$20.6m
S$20.6m
S$20.7m
S$20.9m
S$21.2m
S$21.5m
Growth Rate Estimate Source
Est @ -10.08%
Est @ -6.45%
Est @ -3.91%
Est @ -2.13%
Est @ -0.89%
Est @ -0.01%
Est @ 0.60%
Est @ 1.02%
Est @ 1.32%
Est @ 1.53%
Present Value (SGD, Millions) Discounted @ 8.9%
S$21.7
S$18.6
S$16.4
S$14.8
S$13.5
S$12.4
S$11.4
S$10.6
S$9.9
S$9.2
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = S$138m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 8.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$320m÷ ( 1 + 8.9%)10= S$137m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$275m. 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$0.1, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
SGX:F83 Discounted Cash Flow January 23rd 2024
The Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 COSCO SHIPPING International (Singapore) 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 8.9%, which is based on a levered beta of 1.369. 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 COSCO SHIPPING International (Singapore)
Strength
Debt is well covered by cash flow.
Weakness
Interest payments on debt are not well covered.
Current share price is above our estimate of fair value.
Opportunity
Has sufficient cash runway for more than 3 years based on current free cash flows.
Lack of analyst coverage makes it difficult to determine F83's earnings prospects.
Threat
No apparent threats visible for F83.
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. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For COSCO SHIPPING International (Singapore), there are three further elements you should assess:
Risks: Be aware that COSCO SHIPPING International (Singapore) is showing 1 warning sign in our investment analysis , you should know about...
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. Simply Wall St updates its DCF calculation for every Singaporean stock every day, so if you want to find the intrinsic value of any other stock 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.
