Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Best World International Limited (SGX:CGN) 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 Best World International here.
Is CGN fairly valued?
I use what is known as the 2-stage 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 pulled together the analyst consensus forecast of CGN’s levered free cash flow (FCF) over the next five years and discounted these values at the rate 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 SGD233.1M. Keen to understand how I arrived at this number? Check out our detailed analysis here.
In the visual above, we see how how CGN’s earnings are expected to move going forward, which should give you an idea of CGN’s outlook. Secondly, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable 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 SGD868.6M.
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 SGD1,101.7M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of SGD2.00, which, compared to the current share price of SGD1.32, we see that Best World International is quite undervalued at a 34.09% 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. What is the reason for the share price to differ from the intrinsic value? For CGN, I’ve compiled three important aspects you should look at:
PS. Simply Wall St does a DCF calculation for every SG stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.