In This Article:
I am going to run you through how I calculated the intrinsic value of CSE Global Limited (SGX:544) using the discounted cash flow (DCF) method. 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 CSE Global here.
Crunching the numbers
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 use the analyst consensus estimates of 544’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.51%. 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 S$85.75M. Want to understand how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how 544’s earnings are expected to move going forward, which should give you some color on 544’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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 S$242.53M.
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$328.28M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of SGD0.64, which, compared to the current share price of SGD0.46, we see that CSE Global is about right, perhaps slightly undervalued at a 28.11% 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. What is the reason for the share price to differ from the intrinsic value? For 544, I’ve put together three fundamental factors you should further examine:
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Financial Health: Does 544 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.
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Future Earnings: How does 544’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of 544? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!