A Look At The Intrinsic Value Of Superland Group Holdings Limited (HKG:368)

Key Insights

• Superland Group Holdings' estimated fair value is HK$0.47 based on 2 Stage Free Cash Flow to Equity
• Current share price of HK$0.47 suggests Superland Group Holdings is potentially trading close to its fair value
• Industry average of 1,075% suggests Superland Group Holdings' peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of Superland Group Holdings Limited (HKG:368) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Step By Step Through The Calculation

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. 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.

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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (HK$, Millions)	HK$34.7m	HK$36.2m	HK$37.6m	HK$39.0m	HK$40.3m	HK$41.6m	HK$42.9m	HK$44.2m	HK$45.5m	HK$46.8m
Growth Rate Estimate Source	Est @ 5.15%	Est @ 4.45%	Est @ 3.96%	Est @ 3.62%	Est @ 3.38%	Est @ 3.21%	Est @ 3.09%	Est @ 3.01%	Est @ 2.95%	Est @ 2.91%
Present Value (HK$, Millions) Discounted @ 12%	HK$30.8	HK$28.6	HK$26.5	HK$24.4	HK$22.4	HK$20.6	HK$18.9	HK$17.3	HK$15.8	HK$14.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$220m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = HK$47m× (1 + 2.8%) ÷ (12%– 2.8%) = HK$500m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$500m÷ ( 1 + 12%)¹⁰= HK$155m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is HK$374m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of HK$0.5, 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.

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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Superland Group 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 12%, which is based on a levered beta of 1.888. 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.

View our latest analysis for Superland Group Holdings

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Superland Group Holdings, we've put together three fundamental factors you should explore:

1. Risks: We feel that you should assess the 2 warning signs for Superland Group Holdings (1 is a bit unpleasant!) we've flagged before making an investment in the company.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Hong Kong 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.