In This Article:
Does the share price for Wheelock and Company Limited (SEHK:20) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value 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 May 2018 so be sure check the latest calculation for Wheelock here.
What’s the value?
I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I took the analyst consensus forecast of 20’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 12.03%. 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$73.55B. Keen to understand how I arrived at this number? Check out our detailed analysis here.
In the visual above, we see how how 20’s earnings are expected to move in the future, which should give you some color on 20’s outlook. Secondly, I determine 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. The present value of the terminal value after discounting it back five years is HK$165.37B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$238.92B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of HK$116.70, which, compared to the current share price of HK$58.45, we see that Wheelock is quite good value at a 49.91% 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 20, I’ve compiled three relevant aspects you should further research:
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Financial Health: Does 20 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 20’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 20? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!