A look at the intrinsic value of Sino Golf Holdings Limited (HKG: 361)
Does the December share price for Sino Golf Holdings Limited (HKG: 361) reflect what it is really worth? Today we’re going to estimate the intrinsic value of the stock by taking expected future cash flows and discounting them to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
Check out our latest review for Sino Golf Holdings
The model
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth, and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for the next ten years. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of those future cash flows is then discounted to today’s value. :
10-year free cash flow (FCF) forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (HK $, Million) | HK $ 24.9 million | HK $ 30.7 million | HK $ 35.9 million | HK $ 40.2 million | HK $ 43.9 million | HK $ 46.8 million | HK $ 49.2 million | HK $ 51.2 million | HK $ 52.9 million | HK $ 54.3 million |
Source of estimated growth rate | Est @ 32.71% | East @ 23.34% | Est @ 16.78% | Is 12.19% | Est @ 8.98% | Est @ 6.73% | Est at 5.15% | East @ 4.05% | East @ 3.28% | East @ 2.74% |
Present value (HK $, Million) discounted at 8.0% | 23.1 HK $ | HK $ 26.4 | 28.5 HK $ | HK $ 29.6 | HK $ 29.9 | HK $ 29.6 | 28.8 HK $ | HK $ 27.7 | 26.5 HK $ | HK $ 25.3 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = HK $ 275 million
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.5%. We discount the terminal cash flows to their present value at a cost of equity of 8.0%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = HK $ 54 million × (1 + 1.5%) ÷ (8.0% – 1.5%) = HK $ 851 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= HK $ 851 million ÷ (1 + 8.0%)^{ten}= HK $ 396 million
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is HK $ 671 million. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of HK $ 0.1, the company appears around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider Sino Golf Holdings to be 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 takes into account debt. . In this calculation, we used 8.0%, which is based on a leveraged beta of 1.325. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our industry average beta from comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Looking forward:
While a business valuation is important, ideally it won’t be the only analysis that you look at for a business. DCF models are not the ultimate solution for investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For Sino Golf Holdings, there are three additional aspects to consider:
- Risks: Note that Sino Golf Holdings displays 2 warning signs in our investment analysis , you must know…
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
- Other environmentally friendly companies: Are you concerned about the environment and think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover stocks you might not have thought of!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each SEHK share. If you want to find the calculation for other actions, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.