I am going to run you through how I calculated the intrinsic value of CT Environmental Group Limited (SEHK:1363) using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in May 2018 so be sure check the latest calculation for CT Environmental Group here.
What’s the value?
I use what is known as the 2-stage 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 begin, I pulled together the analyst consensus estimates of 1363’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity 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$3.77B. Want to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how 1363’s earnings are expected to move going forward, which should give you an idea of 1363’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. 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 HK$9.60B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$13.37B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$2.12, which, compared to the current share price of HK$1.2, we see that CT Environmental Group is quite undervalued at a 43.33% discount to what it is available for right now.
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. What is the reason for the share price to differ from the intrinsic value? For 1363, there are three key aspects you should further research:
-
Financial Health: Does 1363 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.
-
Future Earnings: How does 1363’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.
-
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of 1363? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!