Stock Analysis
- Hong Kong
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- Hospitality
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- SEHK:696
An Intrinsic Calculation For TravelSky Technology Limited (HKG:696) Suggests It's 41% Undervalued
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, TravelSky Technology fair value estimate is HK$16.75
- Current share price of HK$9.94 suggests TravelSky Technology is potentially 41% undervalued
- Analyst price target for 696 is CN¥11.86 which is 29% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of TravelSky Technology Limited (HKG:696) by estimating the company's future cash flows and discounting them to their present value. This will be done using 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 would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for TravelSky Technology
What's The Estimated Valuation?
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. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥2.30b | CN¥2.53b | CN¥2.70b | CN¥2.84b | CN¥2.96b | CN¥3.07b | CN¥3.17b | CN¥3.26b | CN¥3.35b | CN¥3.43b |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Est @ 6.62% | Est @ 5.28% | Est @ 4.34% | Est @ 3.68% | Est @ 3.22% | Est @ 2.90% | Est @ 2.68% | Est @ 2.52% |
Present Value (CN¥, Millions) Discounted @ 8.2% | CN¥2.1k | CN¥2.2k | CN¥2.1k | CN¥2.1k | CN¥2.0k | CN¥1.9k | CN¥1.8k | CN¥1.7k | CN¥1.6k | CN¥1.6k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥19b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥3.4b× (1 + 2.2%) ÷ (8.2%– 2.2%) = CN¥58b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥58b÷ ( 1 + 8.2%)10= CN¥26b
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 CN¥46b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of HK$9.9, the company appears quite good value at a 41% discount to where the stock price trades currently. 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.
Important 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 TravelSky Technology 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 8.2%, which is based on a levered beta of 1.104. 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 TravelSky Technology
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
- Annual earnings are forecast to grow faster than the Hong Kong market.
- Trading below our estimate of fair value by more than 20%.
- Debt is not well covered by operating cash flow.
- Paying a dividend but company has no free cash flows.
- Revenue is forecast to grow slower than 20% per year.
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. Why is the intrinsic value higher than the current share price? For TravelSky Technology, there are three pertinent elements you should explore:
- Financial Health: Does 696 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does 696's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- 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.
Valuation is complex, but we're here to simplify it.
Discover if TravelSky Technology 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.
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About SEHK:696
TravelSky Technology
Provides information technology solutions for aviation and travel industries in the People’s Republic of China.