A Look At The Intrinsic Value Of Fullwealth International Group Holdings Limited (HKG:1034)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Fullwealth International Group Holdings fair value estimate is HK$0.60
• With HK$0.51 share price, Fullwealth International Group Holdings appears to be trading close to its estimated fair value
• Fullwealth International Group Holdings' peers are currently trading at a premium of 143% on average

How far off is Fullwealth International Group Holdings Limited (HKG:1034) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Fullwealth International Group Holdings

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. To start off with, we need to estimate the next ten years of cash flows. 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (HK$, Millions)	HK$67.9m	HK$68.4m	HK$69.1m	HK$70.0m	HK$71.0m	HK$72.0m	HK$73.2m	HK$74.4m	HK$75.7m	HK$77.0m
Growth Rate Estimate Source	Est @ 0.22%	Est @ 0.69%	Est @ 1.03%	Est @ 1.26%	Est @ 1.42%	Est @ 1.53%	Est @ 1.61%	Est @ 1.67%	Est @ 1.71%	Est @ 1.74%
Present Value (HK$, Millions) Discounted @ 8.7%	HK$62.5	HK$57.9	HK$53.9	HK$50.2	HK$46.9	HK$43.8	HK$40.9	HK$38.3	HK$35.9	HK$33.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$464m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 1.8%. We discount the terminal cash flows to today's value at a cost of equity of 8.7%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = HK$77m× (1 + 1.8%) ÷ (8.7%– 1.8%) = HK$1.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$1.1b÷ ( 1 + 8.7%)¹⁰= HK$499m

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$962m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of HK$0.5, the company appears about fair value at a 15% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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 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 Fullwealth International 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 8.7%, which is based on a levered beta of 0.984. 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 Fullwealth International Group Holdings

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Fullwealth International Group Holdings, we've put together three important aspects you should assess:

1. Risks: For example, we've discovered 2 warning signs for Fullwealth International Group Holdings (1 is a bit unpleasant!) that you should be aware of before investing here.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.

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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.