Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Courts Asia Limited (SGX:RE2) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in 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 Courtsia here.
What’s the value?
I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I took the analyst consensus forecast of RE2’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 11.84%. 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 SGD106.0M. Want to understand how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how RE2’s earnings are expected to move in the future, which should give you some color on RE2’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided 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. The present value of the terminal value after discounting it back five years is SGD75.6M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is SGD181.6M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of SGD0.35, which, compared to the current share price of SGD0.32, we find that Courtsia is about right, perhaps slightly undervalued at a 9.22% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For RE2, I’ve compiled three fundamental 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.