Is There An Opportunity With Yangzijiang Shipbuilding (Holdings) Ltd.'s (SGX:BS6) 32% Undervaluation?

editorial-team@simplywallst.com (Simply Wall St)

Mon, Apr 7, 2025, 1:06 AM 6 min read

Using the 2 Stage Free Cash Flow to Equity, Yangzijiang Shipbuilding (Holdings) fair value estimate is S$3.18
Yangzijiang Shipbuilding (Holdings) is estimated to be 32% undervalued based on current share price of S$2.17
The CN¥3.26 analyst price target for BS6 is 2.8% more than our estimate of fair value

How far off is Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥7.09b	CN¥2.07b	CN¥6.91b	CN¥5.57b	CN¥4.85b	CN¥4.45b	CN¥4.22b	CN¥4.09b	CN¥4.04b	CN¥4.03b
Growth Rate Estimate Source	Analyst x1	Analyst x2	Analyst x1	Est @ -19.39%	Est @ -12.89%	Est @ -8.34%	Est @ -5.16%	Est @ -2.93%	Est @ -1.37%	Est @ -0.28%
Present Value (CN¥, Millions) Discounted @ 7.8%	CN¥6.6k	CN¥1.8k	CN¥5.5k	CN¥4.1k	CN¥3.3k	CN¥2.8k	CN¥2.5k	CN¥2.2k	CN¥2.1k	CN¥1.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥33b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥4.0b× (1 + 2.3%) ÷ (7.8%– 2.3%) = CN¥74b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥74b÷ ( 1 + 7.8%)¹⁰= CN¥35b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥68b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of S$2.2, the company appears quite good value at a 32% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — SGX:BS6 Discounted Cash Flow April 7th 2025

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that 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 weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.8%, which is based on a levered beta of 1.053. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

View our latest analysis for Yangzijiang Shipbuilding (Holdings)

SWOT Analysis for Yangzijiang Shipbuilding (Holdings)

Strength

Earnings growth over the past year exceeded the industry.

Debt is not viewed as a risk.

Dividends are covered by earnings and cash flows.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Machinery market.

Opportunity

Annual earnings are forecast to grow faster than the Singaporean market.

Good value based on P/E ratio and estimated fair value.

Threat

Revenue is forecast to grow slower than 20% per year.

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Yangzijiang Shipbuilding (Holdings), we've put together three further aspects you should further examine:

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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Singaporean stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.