Estimating The Intrinsic Value Of Hi-P International Limited (SGX:H17)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Hi-P International Limited (SGX:H17) 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. Also note that this article was written in January 2018 so be sure check the latest calculation for Hi-P International here.
Crunching the numbers
I will be using the 2-stage growth 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 start off, I use the analyst consensus estimates of H17’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.38%. 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 SGD376.9M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how H17’s top and bottom lines are expected to move in the future, which should give you some color on H17’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the steady 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 SGD1,148.2M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is SGD1,525.1M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of SGD1.89, which, compared to the current share price of SGD1.9, we see that Hi-P International is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For H17, there are three fundamental aspects you should look at:
1. Financial Health: Does H17 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 H17’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 H17? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every SG 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.
