Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Best World International Limited (SGX:CGN) as an investment opportunity by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 and its not October 2018 then I highly recommend you check out the latest calculation for Best World International by following the link below.
View our latest analysis for Best World International
What’s the value?
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (SGD, Millions) | SGD48.83 | SGD59.27 | SGD69.94 | SGD81.83 | SGD94.92 |
| Source | Analyst x2 | Analyst x2 | Est @ 18%, capped from 33.99% | Est @ 17%, capped from 33.99% | Est @ 16%, capped from 33.99% |
| Present Value Discounted @ 8.51% | SGD45.00 | SGD50.34 | SGD54.74 | SGD59.02 | SGD63.09 |
Present Value of 5-year Cash Flow (PVCF)= S$272m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.6%. We discount this to today’s value at a cost of equity of 8.5%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = S$95m × (1 + 2.6%) ÷ (8.5% – 2.6%) = S$1.6b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = S$1.6b ÷ ( 1 + 8.5%)5 = S$1.1b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is S$1.4b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of SGD2.47. Relative to the current share price of SGD1.48, the stock is quite good value at a 40% discount to what it is available for right now.