Estimated intrinsic value of Sling Group Holdings Limited (HKG:8285)
Today we are going to give a simple overview of a valuation method used to estimate the attractiveness of Sling Group Holdings Limited (HKG:8285) as an investment opportunity by taking cash flow expected futures and discounting them to their present value. One way to do this is to use the discounted cash flow (DCF) model. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.
Check out our latest analysis for Sling Group Holdings
The model
We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF (CN¥, Million) | CN¥1.46m | CN¥1.59m | CN¥1.69m | CN¥1.78m | CN¥1.85m | CN¥1.91m | CN¥1.96m | CN¥2.01m | CN¥2.05m | CN¥2.09m |
Growth rate estimate Source | Is at 12.02% | Is at 8.86% | Is at 6.65% | Is at 5.1% | Is at 4.01% | Is at 3.25% | Is at 2.72% | Is at 2.35% | Is at 2.09% | Is at 1.91% |
Present value (CN¥, million) discounted at 7.8% | CN¥1.4 | CN¥1.4 | CN¥1.4 | CN¥1.3 | CN¥1.3 | CN¥1.2 | CN¥1.2 | CN¥1.1 | CN¥1.0 | CN¥1.0 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = CN¥12m
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.5%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.8%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = CN¥2.1m × (1 + 1.5%) ÷ (7.8%–1.5%) = CN¥33m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= CN¥33m÷ ( 1 + 7.8%)^{ten}= CN¥16m
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 28 million yen. In the last step, we divide the equity value by the number of shares outstanding. Against the current share price of HK$0.07, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Sling Group Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 7.8%, which is based on a leveraged beta of 1.295. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Look forward:
Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of many factors you need to assess for a company. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For Sling Group Holdings, we’ve rounded up three more things you should consider in more detail:
- Risks: Be aware that Sling Group Holdings displays 3 warning signs in our investment analysis and 2 of them should not be ignored…
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
- Other top analyst picks: Interested to see what the analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think could have attractive future prospects!
PS. The Simply Wall St app performs an updated cash flow assessment for each SEHK stock every day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.