I am going to run you through how I calculated the intrinsic value of Dynagreen Environmental Protection Group Co Ltd (SEHK:1330) 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. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for Dynagreen Environmental Protection Group here.
What’s the value?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin, I pulled together the analyst consensus forecast of 1330’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 11.55%. This resulted in a present value of 5-year cash flow of CN¥-824.9M. Keen to understand how I calculated this value? Check out our detailed analysis here.
Above is a visual representation of how 1330’s top and bottom lines are expected to move in the future, which should give you an idea of 1330’s outlook. Next, 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¥7,935.2M.
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 CN¥7,110.3M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of HK$8.11, which, compared to the current share price of HK$4.48, we see that Dynagreen Environmental Protection Group is quite undervalued at a 44.74% 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 1330, there are three relevant factors you should further examine:
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.