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A Look At The Fair Value Of Greenway Mining Group Limited (HKG:2133)

Simply Wall St

How far off is Greenway Mining Group Limited (HKG:2133) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. I will be using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Greenway Mining Group

The model

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Levered FCF (CN¥, Millions) CN¥15.1m CN¥18.9m CN¥22.3m CN¥25.3m CN¥27.7m CN¥29.8m CN¥31.6m CN¥33.0m CN¥34.3m CN¥35.5m
Growth Rate Estimate Source Est @ 34.67% Est @ 24.87% Est @ 18.01% Est @ 13.21% Est @ 9.85% Est @ 7.49% Est @ 5.85% Est @ 4.69% Est @ 3.89% Est @ 3.32%
Present Value (CN¥, Millions) Discounted @ 15.3% CN¥13.1 CN¥14.2 CN¥14.6 CN¥14.3 CN¥13.6 CN¥12.7 CN¥11.6 CN¥10.6 CN¥9.5 CN¥8.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= CN¥122.0m

After calculating the present value of future cash flows in the intial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 2%. We discount the terminal cash flows to today's value at a cost of equity of 15.3%.

Terminal Value (TV) = FCF2029 × (1 + g) ÷ (r – g) = CN¥35m × (1 + 2%) ÷ (15.3% – 2%) = CN¥272m

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = CN¥CN¥272m ÷ ( 1 + 15.3%)10 = CN¥65.50m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥187.50m. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value estimate in the company’s reported currency of CN¥0.052. However, 2133’s primary listing is in Hong Kong, and 1 share of 2133 in CNY represents 1.106 ( CNY/ HKD) share of SEHK:2133, so the intrinsic value per share in HKD is HK$0.058. Compared to the current share price of HK$0.060, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

SEHK:2133 Intrinsic value, September 18th 2019

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 Greenway Mining Group 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 15.3%, which is based on a levered beta of 2. 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.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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 Greenway Mining Group, I've put together three fundamental factors you should further research:

  1. Financial Health: Does 2133 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. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of 2133? 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 updates its DCF calculation for every HK stock every day, so if you want to find the intrinsic value of any other stock just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.