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Hutchison Port Holdings Trust (SGX:NS8U) Is Trading At A 29.13% Discount

Ricardo Crouch

Does the share price for Hutchison Port Holdings Trust (SGX:NS8U) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s 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 August 2018 then I highly recommend you check out the latest calculation for Hutchison Port Holdings Trust by following the link below.

See our latest analysis for Hutchison Port Holdings Trust

The method

We are going to use a two-stage DCF 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 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 the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2019 2020 2021 2022 2023
Levered FCF (HK$, Millions) HK$4.05k HK$3.97k HK$3.36k HK$3.29k HK$3.22k
Source Analyst x3 Analyst x3 Analyst x1 Est @ -2.01% Est @ -2.01%
Present Value Discounted @ 16.01% HK$3.49k HK$2.95k HK$2.15k HK$1.82k HK$1.53k

Present Value of 5-year Cash Flow (PVCF)= HK$11.94b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.6%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 16%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = HK$3.22b × (1 + 2.6%) ÷ (16% – 2.6%) = HK$24.57b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = HK$24.57b ÷ ( 1 + 16%)5 = HK$11.70b

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 HK$23.64b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of HK$2.71. However, NS8U’s primary listing is in Singapore, and 1 share of NS8U in HKD represents 0.127 ( HKD/ USD) share of SGX:NS8U, so the intrinsic value per share in USD is $0.35. Relative to the current share price of $0.24, the stock is about right, perhaps slightly undervalued at a 29.1% discount to what it is available for right now.

SGX:NS8U Intrinsic Value Export August 28th 18

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Hutchison Port Holdings Trust 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 16%, which is based on a levered beta of 1.808. 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.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For NS8U, I’ve compiled three key factors you should look at:

  1. Financial Health: Does NS8U 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 NS8U’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.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of NS8U? 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 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 editorial-team@simplywallst.com.