How far off is Swire Properties Limited (SEHK:1972) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. 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. Also note that this article was written in December 2017 so be sure check the latest calculation for Swire Properties here.
What’s the value?
I’ve used the 2-stage growth 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 took the analyst consensus forecast of 1972’s levered free cash flow (FCF) over the next five years and discounted these figures 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 HK$23,492.9M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how 1972’s earnings are expected to move in the future, which should give you some color on 1972’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 steady 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 HK$88,914.1M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$112,407.0M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$19.21, which, compared to the current share price of HK$25.5, we find that Swire Properties is rather 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. What is the reason for the share price to differ from the intrinsic value? For 1972, I’ve compiled three pertinent aspects you should look at:
PS. Simply Wall St does a DCF calculation for every HK 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.