Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Genting Singapore Limited (SGX:G13) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. I will use the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Genting Singapore by following the link below.
Crunching the numbers
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow estimate
|Levered FCF (SGD, Millions)||SGD926.97||SGD902.99||SGD914.40||SGD927.40||SGD939.90|
|Source||Analyst x9||Analyst x9||Analyst x2||Analyst x2||Analyst x1|
|Present Value Discounted @ 9.3%||SGD848.08||SGD755.83||SGD700.25||SGD649.76||SGD602.48|
Present Value of 5-year Cash Flow (PVCF)= S$3.6b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.6%. We discount this to today’s value at a cost of equity of 9.3%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = S$940m × (1 + 2.6%) ÷ (9.3% – 2.6%) = S$14b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = S$14b ÷ ( 1 + 9.3%)5 = S$9.2b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is S$13b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of SGD1.06. Relative to the current share price of SGD0.99, the stock is about right, perhaps slightly undervalued at a 6.2% discount to what it is available for right now.
I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Genting Singapore as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.3%, which is based on a levered beta of 0.906. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For G13, there are three essential aspects you should look at:
- Financial Health: Does G13 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.
- Future Earnings: How does G13’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.
- Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of G13? 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 SGX every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.