Calculating The Fair Value Of WH Group Limited (HKG:288)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of WH Group Limited (SEHK:288) 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 February 2018 then I highly recommend you check out the latest calculation for WH Group here.
What’s the value?
We are going to use a two-stage DCF 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. Firstly, I took the analyst consensus forecast of 288’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 10.99%. 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 $5,908.8M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how 288’s earnings are expected to move in the future, which should give you an idea of 288’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. The present value of the terminal value after discounting it back five years is $14,058.0M.
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 $19,966.8M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$10.65, which, compared to the current share price of HK$9.69, we find that WH Group is about right, perhaps slightly undervalued at a 9.03% 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.
For 288, I’ve compiled three pertinent factors you should further research:
1. Financial Health: Does 288 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does 288’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of 288? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the SEHK every 6 hours. If you want to find the calculation for other stocks 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.
