Stock Analysis

Estimating The Fair Value Of Marssenger Kitchenware Co., Ltd. (SZSE:300894)

SZSE:300894
Source: Shutterstock

Key Insights

  • The projected fair value for Marssenger Kitchenware is CN¥13.98 based on 2 Stage Free Cash Flow to Equity
  • Current share price of CN¥12.45 suggests Marssenger Kitchenware is potentially trading close to its fair value
  • The CN¥16.47 analyst price target for 300894 is 18% more than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Marssenger Kitchenware Co., Ltd. (SZSE:300894) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Marssenger Kitchenware

Is Marssenger Kitchenware Fairly Valued?

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. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (CN¥, Millions) CN¥369.0m CN¥388.0m CN¥403.9m CN¥418.9m CN¥433.4m CN¥447.6m CN¥461.6m CN¥475.8m CN¥490.0m CN¥504.5m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 4.09% Est @ 3.72% Est @ 3.46% Est @ 3.28% Est @ 3.15% Est @ 3.06% Est @ 3.00% Est @ 2.95%
Present Value (CN¥, Millions) Discounted @ 9.6% CN¥337 CN¥323 CN¥306 CN¥290 CN¥274 CN¥258 CN¥242 CN¥228 CN¥214 CN¥201

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥2.7b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.6%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥504m× (1 + 2.9%) ÷ (9.6%– 2.9%) = CN¥7.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥7.6b÷ ( 1 + 9.6%)10= CN¥3.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥5.7b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥12.5, the company appears about fair value at a 11% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
SZSE:300894 Discounted Cash Flow August 14th 2024

The Assumptions

Now 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 Marssenger Kitchenware 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 9.6%, which is based on a levered beta of 1.362. 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 Marssenger Kitchenware

Strength
  • Debt is not viewed as a risk.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Earnings declined over the past year.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Current share price is below our estimate of fair value.
Threat
  • Dividends are not covered by earnings and cashflows.
  • Annual earnings are forecast to grow slower than the Chinese market.

Looking Ahead:

Whilst important, the DCF calculation 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. 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. 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 Marssenger Kitchenware, there are three pertinent factors you should further research:

  1. Risks: We feel that you should assess the 2 warning signs for Marssenger Kitchenware we've flagged before making an investment in the company.
  2. Future Earnings: How does 300894'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SZSE every day. If you want to find the calculation for other stocks just search here.

New: Manage All Your Stock Portfolios in One Place

We've created the ultimate portfolio companion for stock investors, and it's free.

• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks

Try a Demo Portfolio for Free

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.