Stock Analysis

A Look At The Intrinsic Value Of Golden Resources Development International Limited (HKG:677)

SEHK:677
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Key Insights

  • Golden Resources Development International's estimated fair value is HK$1.0 based on 2 Stage Free Cash Flow to Equity
  • Current share price of HK$0.9 suggests Golden Resources Development International is trading close to its fair value
  • Golden Resources Development International's peers are currently trading at a premium of 691% on average

Today we will run through one way of estimating the intrinsic value of Golden Resources Development International Limited (HKG:677) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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.

Check out our latest analysis for Golden Resources Development International

Step By Step Through The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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) forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (HK$, Millions) HK$125.2m HK$112.7m HK$105.4m HK$101.1m HK$98.7m HK$97.5m HK$97.2m HK$97.5m HK$98.1m HK$99.0m
Growth Rate Estimate Source Est @ -14.97% Est @ -9.99% Est @ -6.51% Est @ -4.07% Est @ -2.36% Est @ -1.17% Est @ -0.33% Est @ 0.25% Est @ 0.66% Est @ 0.95%
Present Value (HK$, Millions) Discounted @ 7.1% HK$117 HK$98.3 HK$85.8 HK$76.8 HK$70.0 HK$64.6 HK$60.1 HK$56.3 HK$52.9 HK$49.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$732m

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 1.6%. We discount the terminal cash flows to today's value at a cost of equity of 7.1%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = HK$99m× (1 + 1.6%) ÷ (7.1%– 1.6%) = HK$1.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= HK$1.8b÷ ( 1 + 7.1%)10= HK$925m

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$1.7b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of HK$0.9, the company appears about fair value at a 4.7% discount to where the stock price trades currently. 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.

dcf
SEHK:677 Discounted Cash Flow January 28th 2023

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 Golden Resources Development International 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 0.800. 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 Golden Resources Development International

Strength
  • Debt is not viewed as a risk.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Consumer Retailing market.
Opportunity
  • Current share price is below our estimate of fair value.
  • Lack of analyst coverage makes it difficult to determine 677's earnings prospects.
Threat
  • No apparent threats visible for 677.

Next Steps:

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 Golden Resources Development International, we've put together three fundamental items you should explore:

  1. Risks: Case in point, we've spotted 1 warning sign for Golden Resources Development International you should be aware of.
  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 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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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.

About SEHK:677

Golden Resources Development International

An investment holding company, engages in the sourcing, importing, wholesaling, processing, packaging, marketing, and distributing of rice and food products in Hong Kong, Vietnam, Mainland China, and internationally.

Flawless balance sheet second-rate dividend payer.