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Is Wynn Macau Limited (HKG:1128) Worth HK$026.65 Based On Intrinsic Value?

I am going to run you through how I calculated the intrinsic value of Wynn Macau Limited (HKG:1128) by taking the expected future cash flows and discounting them to today’s value. I will be using 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 June 2018 then I highly recommend you check out the latest calculation for Wynn Macau by following the link below. See our latest analysis for Wynn Macau

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. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2018

2019

2020

2021

2022

Levered FCF ($, Millions)

$1.44k

$1.49k

$1.65k

$1.81k

$1.98k

Source

Analyst x5

Analyst x9

Analyst x5

Analyst x1

Analyst x1

Present Value Discounted @ 15.36%

$1.25k

$1.12k

$1.07k

$1.02k

$971.17

Present Value of 5-year Cash Flow (PVCF)= HK$5.44b

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We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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 (2.2%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 15.4%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = HK$1.98b × (1 + 2.2%) ÷ (15.4% – 2.2%) = HK$15.41b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = HK$15.41b ÷ ( 1 + 15.4%)5 = HK$7.54b

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$12.98b. 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 in the company’s reported currency of $2.5. However, 1128’s primary listing is in Macau, and 1 share of 1128 in USD represents 7.846 ( USD/ HKD) share of SEHK:1128, so the intrinsic value per share in HKD is HK$19.62. Compared to the current share price of HK$26.65, the stock is quite expensive and not available at a discount at this time.

SEHK:1128 Intrinsic Value June 26th 18
SEHK:1128 Intrinsic Value June 26th 18

Important assumptions

Now 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Wynn Macau 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 15.4%, which is based on a levered beta of 1.687. 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:

Whilst important, DCF calculation 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 1128, I’ve put together three pertinent factors you should further research:

  1. Financial Health: Does 1128 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 1128’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 1128? 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 HK 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.