How far off is ISDN Holdings Limited (SGX:I07) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced 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 June 2018 so be sure check the latest calculation for ISDN Holdings here.

Is I07 fairly valued?

We are going to use a two-stage DCF 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. Generally I like to use analyst consensus estimates for free cash flow, but given that I07 has low analyst coverage with no forecast available, I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years, capped at a reasonable level, and discounted these figures at the cost of equity of 10.08%. This resulted in a present value of 5-year cash flow of S$27.20M. Want to know how I arrived at this number? Take a look at our detailed analysis here.

The graph above shows how I07’s earnings are expected to move going forward, which should give you an idea of I07’s outlook. Next, I calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of S$76.18M.

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$103.38M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of SGD0.26, which, compared to the current share price of SGD0.215, we see that ISDN Holdings is about right, perhaps slightly undervalued at a 17.91% discount to what it is available for right now.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.

For I07, I’ve put together three pertinent factors you should further research:

1. Financial Health: Does I07 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 I07’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 I07? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!