Estimating The Intrinsic Value Of Wong Fong Industries Limited (Catalist:1A1)
Simply Wall St
6 min read
Key Insights
Using the 2 Stage Free Cash Flow to Equity, Wong Fong Industries fair value estimate is S$0.14
Wong Fong Industries' S$0.16 share price indicates it is trading at similar levels as its fair value estimate
Industry average of 5.9% suggests Wong Fong Industries' peers are currently trading at a lower premium to fair value
In this article we are going to estimate the intrinsic value of Wong Fong Industries Limited (Catalist:1A1) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. 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 generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.
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. 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
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (SGD, Millions)
S$2.74m
S$2.52m
S$2.40m
S$2.33m
S$2.29m
S$2.28m
S$2.29m
S$2.31m
S$2.34m
S$2.37m
Growth Rate Estimate Source
Est @ -12.25%
Est @ -7.98%
Est @ -4.99%
Est @ -2.90%
Est @ -1.44%
Est @ -0.41%
Est @ 0.31%
Est @ 0.81%
Est @ 1.16%
Est @ 1.41%
Present Value (SGD, Millions) Discounted @ 8.3%
S$2.5
S$2.1
S$1.9
S$1.7
S$1.5
S$1.4
S$1.3
S$1.2
S$1.1
S$1.1
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = S$16m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.3%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$38m÷ ( 1 + 8.3%)10= S$17m
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 S$33m. 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$0.2, 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.
Catalist:1A1 Discounted Cash Flow August 10th 2023
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Wong Fong Industries 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 8.3%, which is based on a levered beta of 1.274. 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 Wong Fong Industries
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Machinery market.
Current share price is above our estimate of fair value.
Opportunity
Significant insider buying over the past 3 months.
Lack of analyst coverage makes it difficult to determine 1A1's earnings prospects.
Threat
No apparent threats visible for 1A1.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Wong Fong Industries, we've compiled three important factors you should explore:
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 1A1's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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!
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.
