I am going to run you through how I calculated the intrinsic value of China Communications Construction Company Limited (SEHK:1800) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for China Communications Construction here.
What’s the value?
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I pulled together the analyst consensus estimates of 1800’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.91%. This resulted in a present value of 5-year cash flow of CN¥51,432.4M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how 1800’s top and bottom lines are expected to move going forward, which should give you some color on 1800’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable 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. Discounting the terminal value back five years gives us a present value of CN¥158,533.2M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥209,965.6M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$15.47, which, compared to the current share price of HK$8.85, we see that China Communications Construction is quite good value at a 42.78% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, 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 1800, there are three relevant factors you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the SEHK 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.