Advertisement
Australia markets closed
  • ALL ORDS

    8,491.50
    -7.20 (-0.08%)
     
  • ASX 200

    8,214.50
    -8.50 (-0.10%)
     
  • AUD/USD

    0.6753
    +0.0010 (+0.14%)
     
  • OIL

    75.49
    -0.36 (-0.47%)
     
  • GOLD

    2,674.20
    +34.90 (+1.32%)
     
  • Bitcoin AUD

    92,889.69
    +2,809.12 (+3.12%)
     
  • XRP AUD

    0.80
    +0.00 (+0.46%)
     
  • AUD/EUR

    0.6170
    +0.0011 (+0.18%)
     
  • AUD/NZD

    1.1044
    -0.0010 (-0.09%)
     
  • NZX 50

    12,845.64
    +91.06 (+0.71%)
     
  • NASDAQ

    20,271.97
    +30.21 (+0.15%)
     
  • FTSE

    8,253.65
    +15.92 (+0.19%)
     
  • Dow Jones

    42,863.86
    +409.74 (+0.97%)
     
  • DAX

    19,373.83
    +162.93 (+0.85%)
     
  • Hang Seng

    21,251.98
    +614.74 (+2.98%)
     
  • NIKKEI 225

    39,605.80
    +224.91 (+0.57%)
     

An Intrinsic Calculation For Hongkong Land Holdings Limited (SGX:H78) Suggests It's 31% Undervalued

Key Insights

  • Hongkong Land Holdings' estimated fair value is US$4.69 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$3.24 suggests Hongkong Land Holdings is potentially 31% undervalued

  • Analyst price target for H78 is US$3.71 which is 21% below our fair value estimate

In this article we are going to estimate the intrinsic value of Hongkong Land Holdings Limited (SGX:H78) by projecting its future cash flows and then discounting them to today's value. This will be done 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 Hongkong Land Holdings

What's The Estimated Valuation?

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. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$925.1m

US$874.8m

US$848.7m

US$836.2m

US$832.7m

US$835.4m

US$842.4m

US$852.6m

US$865.0m

US$879.1m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Est @ -2.99%

Est @ -1.47%

Est @ -0.42%

Est @ 0.32%

Est @ 0.84%

Est @ 1.20%

Est @ 1.46%

Est @ 1.64%

Present Value ($, Millions) Discounted @ 9.4%

US$845

US$730

US$648

US$583

US$531

US$486

US$448

US$414

US$384

US$357

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$5.4b

After calculating the present value of future cash flows in the initial 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 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 9.4%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$879m× (1 + 2.1%) ÷ (9.4%– 2.1%) = US$12b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$12b÷ ( 1 + 9.4%)10= US$4.9b

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$10b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$3.2, the company appears quite good value at a 31% discount to where the stock price trades currently. 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.

dcf
dcf

Important 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 Hongkong Land 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 9.4%, which is based on a levered beta of 1.606. 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 Hongkong Land Holdings

Strength

  • Debt is well covered by earnings.

  • Dividend is in the top 25% of dividend payers in the market.

Weakness

  • No major weaknesses identified for H78.

Opportunity

  • Expected to breakeven next year.

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Trading below our estimate of fair value by more than 20%.

Threat

  • Debt is not well covered by operating cash flow.

  • Paying a dividend but company is unprofitable.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Hongkong Land Holdings, we've put together three pertinent aspects you should consider:

  1. Risks: As an example, we've found 1 warning sign for Hongkong Land Holdings that you need to consider before investing here.

  2. Future Earnings: How does H78'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: Do you like a good all-rounder? 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 Singaporean stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.