Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Valuetronics Holdings Limited (SGX:BN2) 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. If you are reading this after January 2018 then I highly recommend you check out the latest calculation for Valuetronics Holdings here.
What’s the value?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. Firstly, I took the analyst consensus forecast of BN2’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate 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 HK$543.8M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how BN2’s earnings are expected to move in the future, which should give you some color on BN2’s outlook. Secondly, 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 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 HK$1,835.7M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$2,379.5M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of SGD0.94, which, compared to the current share price of SGD0.955, we find that Valuetronics Holdings is fair value, maybe slightly overvalued at the time of writing.
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 BN2, I’ve compiled three relevant factors you should further examine:
PS. Simply Wall St does a DCF calculation for every SG stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.