Calculating The Intrinsic Value Of E-Home Household Service Holdings Limited (NASDAQ:EJH)
Key Insights
E-Home Household Service Holdings' estimated fair value is US$2.50 based on 2 Stage Free Cash Flow to Equity
Current share price of US$2.02 suggests E-Home Household Service Holdings is potentially trading close to its fair value
When compared to theindustry average discount to fair value of 20%, E-Home Household Service Holdings' competitors seem to be trading at a greater discount
Today we will run through one way of estimating the intrinsic value of E-Home Household Service Holdings Limited (NASDAQ:EJH) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for E-Home Household Service Holdings
Is E-Home Household Service Holdings Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$3.28m | US$2.72m | US$2.41m | US$2.24m | US$2.14m | US$2.09m | US$2.06m | US$2.06m | US$2.07m | US$2.09m |
Growth Rate Estimate Source | Est @ -25.33% | Est @ -17.09% | Est @ -11.32% | Est @ -7.28% | Est @ -4.45% | Est @ -2.47% | Est @ -1.08% | Est @ -0.11% | Est @ 0.57% | Est @ 1.04% |
Present Value ($, Millions) Discounted @ 7.8% | US$3.0 | US$2.3 | US$1.9 | US$1.7 | US$1.5 | US$1.3 | US$1.2 | US$1.1 | US$1.1 | US$1.0 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$16m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$2.1m× (1 + 2.2%) ÷ (7.8%– 2.2%) = US$38m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$38m÷ ( 1 + 7.8%)10= US$18m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$34m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$2.0, the company appears about fair value at a 19% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at E-Home Household Service 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 accounts for debt. In this calculation we've used 7.8%, which is based on a levered beta of 0.923. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for E-Home Household Service Holdings
Strength
Debt is not viewed as a risk.
Weakness
Shareholders have been diluted in the past year.
Opportunity
Has sufficient cash runway for more than 3 years based on current free cash flows.
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine EJH's earnings prospects.
Threat
No apparent threats visible for EJH.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For E-Home Household Service Holdings, there are three essential items you should look at:
Risks: Take risks, for example - E-Home Household Service Holdings has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQCM every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
