Estimating The Intrinsic Value Of Cool Link (Holdings) Limited (HKG:8491)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Cool Link (Holdings) fair value estimate is HK$0.72
• Current share price of HK$0.84 suggests Cool Link (Holdings) is potentially trading close to its fair value
• Cool Link (Holdings)'s peers seem to be trading at a higher premium to fair value based onthe industry average of -403%

Today we will run through one way of estimating the intrinsic value of Cool Link (Holdings) Limited (HKG:8491) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Cool Link (Holdings)

Crunching The Numbers

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 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.

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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (SGD, Millions)	S$548.9k	S$590.6k	S$625.1k	S$654.0k	S$678.5k	S$699.9k	S$718.9k	S$736.4k	S$752.8k	S$768.4k
Growth Rate Estimate Source	Est @ 10.12%	Est @ 7.60%	Est @ 5.85%	Est @ 4.61%	Est @ 3.75%	Est @ 3.15%	Est @ 2.73%	Est @ 2.43%	Est @ 2.22%	Est @ 2.08%
Present Value (SGD, Millions) Discounted @ 8.0%	S$0.5	S$0.5	S$0.5	S$0.5	S$0.5	S$0.4	S$0.4	S$0.4	S$0.4	S$0.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$4.4m

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 8.0%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = S$768k× (1 + 1.7%) ÷ (8.0%– 1.7%) = S$13m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= S$13m÷ ( 1 + 8.0%)¹⁰= S$5.8m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$10m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of HK$0.8, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important 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 Cool Link (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 8.0%, which is based on a levered beta of 1.052. 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 Cool Link (Holdings)

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Cool Link (Holdings), we've put together three fundamental elements you should further research:

1. Risks: Every company has them, and we've spotted 3 warning signs for Cool Link (Holdings) (of which 2 are potentially serious!) you should know about.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 8491's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. 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!

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.

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.