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I am going to run you through how I calculated the intrinsic value of StarHub Ltd (SGX:CC3) 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 February 2018 so be sure check the latest calculation for StarHub here.

Crunching the numbers

I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I use the analyst consensus forecast of CC3’s levered free cash flow (FCF) over the next five years and discounted these figures 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 SGD1,056.8M. Keen to know how I calculated this value? Read our detailed analysis here.

Above is a visual representation of how CC3’s top and bottom lines are expected to move in the future, which should give you an idea of CC3’s outlook. Next, 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. After discounting the terminal value back five years, the present value becomes SGD2,542.5M.

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 SGD3,599.3M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of SGD2.08, which, compared to the current share price of SGD2.78, we find that StarHub is rather overvalued at the time of writing.

Next Steps:

Whilst important, DCF calculation 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 CC3, I’ve put together three key factors you should further examine:

• 1. Financial Health: Does CC3 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.

• 2. Future Earnings: How does CC3’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.

• 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CC3? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!