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- SEHK:1955
A Look At The Intrinsic Value Of Hong Kong Johnson Holdings Co., Ltd. (HKG:1955)
Key Insights
- Hong Kong Johnson Holdings' estimated fair value is HK$0.42 based on 2 Stage Free Cash Flow to Equity
- Current share price of HK$0.43 suggests Hong Kong Johnson Holdings is potentially trading close to its fair value
- Hong Kong Johnson Holdings' peers seem to be trading at a higher premium to fair value based onthe industry average of -475%
Today we will run through one way of estimating the intrinsic value of Hong Kong Johnson Holdings Co., Ltd. (HKG:1955) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for Hong Kong Johnson Holdings
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (HK$, Millions) | HK$21.9m | HK$16.4m | HK$13.6m | HK$12.1m | HK$11.2m | HK$10.8m | HK$10.5m | HK$10.4m | HK$10.4m | HK$10.5m |
Growth Rate Estimate Source | Est @ -36.92% | Est @ -25.14% | Est @ -16.90% | Est @ -11.13% | Est @ -7.09% | Est @ -4.26% | Est @ -2.28% | Est @ -0.89% | Est @ 0.08% | Est @ 0.76% |
Present Value (HK$, Millions) Discounted @ 7.1% | HK$20.4 | HK$14.3 | HK$11.1 | HK$9.2 | HK$8.0 | HK$7.1 | HK$6.5 | HK$6.0 | HK$5.6 | HK$5.3 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$94m
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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.1%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = HK$11m× (1 + 2.3%) ÷ (7.1%– 2.3%) = HK$228m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= HK$228m÷ ( 1 + 7.1%)10= HK$115m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is HK$209m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$0.4, the company appears around fair value at the time of writing. 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.
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 Hong Kong Johnson 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 7.1%, which is based on a levered beta of 0.974. 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.
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. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Hong Kong Johnson Holdings, there are three important elements you should explore:
- Risks: Take risks, for example - Hong Kong Johnson Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
- 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!
- 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. 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.
Valuation is complex, but we're here to simplify it.
Discover if Hong Kong Johnson Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About SEHK:1955
Hong Kong Johnson Holdings
An investment holding company, provides cleaning, janitorial, and other related services for government and non-government sector in Hong Kong.
Flawless balance sheet with proven track record.