Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of NetLink NBN Trust (SGX:CJLU) as an investment opportunity. 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 after December 2017 then I highly recommend you check out the latest calculation for NetLink NBN Trust here.
Is CJLU fairly valued?
We are going to use a two-stage DCF model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I use the analyst consensus forecast of CJLU’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.38%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of SGD415.8M. Keen to know how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how CJLU’s earnings are expected to move in the future, which should give you an idea of CJLU’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes SGD2,416.1M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is SGD2,831.9M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of SGD0.73, which, compared to the current share price of SGD0.825, we find that NetLink NBN Trust is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For CJLU, there are three essential aspects you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the SGX every 6 hours. If you want to find the calculation for other stocks 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.