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Two important questions to ask before you buy SITC International Holdings Company Limited (HKG:1308) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the marine industry, 1308 is currently valued at HK$15.7b. Today we will examine 1308’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
See our latest analysis for SITC International Holdings
What is free cash flow?
SITC International Holdings’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for SITC International Holdings to continue to grow, or at least, maintain its current operations.
I will be analysing SITC International Holdings’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
SITC International Holdings’s yield of 0.75% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on SITC International Holdings but are not being adequately rewarded for doing so.
Does SITC International Holdings have a favourable cash flow trend?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at 1308’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 17%, ramping up from its current levels of US$255m to US$298m in two years’ time. Furthermore, breaking down growth into a year on year basis, 1308 is able to increase its growth rate each year, from 8.0% next year, to 8.4% in the following year. The overall future outlook seems buoyant if 1308 can maintain its levels of capital expenditure as well.
Next Steps:
Given a low free cash flow yield, on the basis of cash, SITC International Holdings becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I recommend you continue to research SITC International Holdings to get a better picture of the company by looking at: