Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Swire Pacific Limited (SEHK:19) as an investment opportunity. 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 Swire Pacific here.

Is 19 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. To start off, I took the analyst consensus forecast of 19’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.85%. 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 HK$39.49B. Want to understand how I arrived at this number? Check out our detailed analysis here.

Above is a visual representation of how 19’s top and bottom lines are expected to move going forward, which should give you some color on 19’s outlook. Secondly, I determine 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 stable 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 HK$79.51B.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$118.99B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$79.32, which, compared to the current share price of HK$76.8, we find that Swire Pacific is about right, perhaps slightly undervalued at a 3.18% 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 19, I’ve put together three important aspects you should look at:

1. Financial Health: Does 19 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 19’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 19? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!