Estimating The Fair Value Of New Provenance Everlasting Holdings Limited (HKG:2326)

Key Insights

• The projected fair value for New Provenance Everlasting Holdings is HK$0.011 based on 2 Stage Free Cash Flow to Equity
• New Provenance Everlasting Holdings' HK$0.012 share price indicates it is trading at similar levels as its fair value estimate
• Industry average of 644% suggests New Provenance Everlasting Holdings' peers are currently trading at a higher premium to fair value

How far off is New Provenance Everlasting Holdings Limited (HKG:2326) 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. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for New Provenance Everlasting Holdings

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. To begin with, we have to get estimates of 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$6.78m	HK$9.40m	HK$12.0m	HK$14.4m	HK$16.4m	HK$18.2m	HK$19.6m	HK$20.8m	HK$21.8m	HK$22.6m
Growth Rate Estimate Source	Est @ 54.35%	Est @ 38.56%	Est @ 27.52%	Est @ 19.78%	Est @ 14.37%	Est @ 10.58%	Est @ 7.93%	Est @ 6.07%	Est @ 4.77%	Est @ 3.86%
Present Value (HK$, Millions) Discounted @ 9.2%	HK$6.2	HK$7.9	HK$9.2	HK$10.1	HK$10.6	HK$10.7	HK$10.6	HK$10.3	HK$9.9	HK$9.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$95m

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 1.7%. We discount the terminal cash flows to today's value at a cost of equity of 9.2%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = HK$23m× (1 + 1.7%) ÷ (9.2%– 1.7%) = HK$310m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$310m÷ ( 1 + 9.2%)¹⁰= HK$129m

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$224m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of HK$0.01, 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 New Provenance Everlasting 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 9.2%, which is based on a levered beta of 1.064. 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 New Provenance Everlasting Holdings

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. For New Provenance Everlasting Holdings, we've compiled three pertinent items you should assess:

1. Risks: Every company has them, and we've spotted 3 warning signs for New Provenance Everlasting Holdings (of which 2 are concerning!) you should know about.
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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks 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.