Nameson Holdings Limited (HKG:1982) Is Trading At A 49.3% Discount

Chris Amalia

Updated Mon, Jun 25, 2018, 8:29 PM

I am going to run you through how I calculated the intrinsic value of Nameson Holdings Limited (HKG:1982) by taking the expected future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. Check out our latest analysis for Nameson Holdings

Step by step through the calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2018	2019	2020	2021	2022
Levered FCF (HK$, Millions)	HK$-184.40	HK$491.00	HK$533.60	HK$577.90	HK$625.87
Source	Analyst x5	Analyst x4	Analyst x5	Extrapolated @ (8.3%)	Extrapolated @ (8.3%)
Present Value Discounted @ 10.09%	HK$-167.49	HK$405.09	HK$399.87	HK$393.36	HK$386.95

Present Value of 5-year Cash Flow (PVCF)= HK$1.42b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.2%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 10.1%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = HK$625.87m × (1 + 2.2%) ÷ (10.1% – 2.2%) = HK$8.11b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = HK$8.11b ÷ ( 1 + 10.1%)⁵ = HK$5.01b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$6.43b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of HK$2.82. Compared to the current share price of HK$1.43, the stock is quite undervalued at a 49.30% discount to what it is available for right now.

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Nameson Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10.1%, which is based on a levered beta of 1.012. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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 1982, I’ve put together three important aspects you should further research:

Financial Health: Does 1982 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 1982’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 1982? 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 does a DCF calculation for every HK stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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