Is There An Opportunity With Yangzijiang Shipbuilding (Holdings) Ltd’s (SGX:BS6) 38.84% Undervaluation?

Simply Wall St.

Mon, Dec 3, 2018, 5:11 PM

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Yangzijiang Shipbuilding (Holdings) Ltd (SGX:BS6) as an investment opportunity by taking the expected future cash flows and discounting them to today’s value. This is done 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. If you are reading this and its not December 2018 then I highly recommend you check out the latest calculation for Yangzijiang Shipbuilding (Holdings) by following the link below.

See our latest analysis for Yangzijiang Shipbuilding (Holdings)

The method

I’m using the 2-stage growth 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. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (CN¥, Millions)	CN¥2.20k	CN¥2.53k	CN¥2.75k	CN¥2.98k	CN¥3.24k
Source	Analyst x3	Analyst x4	Est @ 8.69%	Est @ 8.69%	Est @ 8.69%
Present Value Discounted @ 9.23%	CN¥2.02k	CN¥2.12k	CN¥2.11k	CN¥2.10k	CN¥2.09k

Present Value of 5-year Cash Flow (PVCF)= CN¥10b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.6%. We discount this to today’s value at a cost of equity of 9.2%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = CN¥3.2b × (1 + 2.6%) ÷ (9.2% – 2.6%) = CN¥50b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = CN¥50b ÷ ( 1 + 9.2%)⁵ = CN¥32b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥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 SGD2.13. Relative to the current share price of SGD1.3, the stock is quite good value at a 39% discount to what it is available for right now.

SGX:BS6 Intrinsic Value Export December 4th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Yangzijiang Shipbuilding (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 9.2%, which is based on a levered beta of 0.896. 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:

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 BS6, I’ve put together three fundamental factors you should further research:

Financial Health: Does BS6 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 BS6’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 BS6? 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 SG stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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