Calculating The Intrinsic Value Of StarGlory Holdings Company Limited (HKG:8213)

Key Insights

• StarGlory Holdings' estimated fair value is HK$0.51 based on 2 Stage Free Cash Flow to Equity
• StarGlory Holdings' HK$0.41 share price indicates it is trading at similar levels as its fair value estimate
• StarGlory Holdings' peers are currently trading at a premium of 80% on average

Today we will run through one way of estimating the intrinsic value of StarGlory Holdings Company Limited (HKG:8213) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. 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 StarGlory Holdings

Is StarGlory Holdings Fairly Valued?

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) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (HK$, Millions)	HK$19.2m	HK$22.0m	HK$24.4m	HK$26.3m	HK$27.9m	HK$29.3m	HK$30.4m	HK$31.4m	HK$32.3m	HK$33.1m
Growth Rate Estimate Source	Est @ 19.99%	Est @ 14.52%	Est @ 10.68%	Est @ 8.00%	Est @ 6.12%	Est @ 4.81%	Est @ 3.89%	Est @ 3.24%	Est @ 2.79%	Est @ 2.48%
Present Value (HK$, Millions) Discounted @ 12%	HK$17.2	HK$17.7	HK$17.5	HK$17.0	HK$16.1	HK$15.2	HK$14.1	HK$13.0	HK$12.0	HK$11.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$151m

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 (1.7%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = HK$33m× (1 + 1.7%) ÷ (12%– 1.7%) = HK$341m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$341m÷ ( 1 + 12%)¹⁰= HK$114m

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$265m. 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 about fair value at a 18% 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 StarGlory 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 12%, which is based on a levered beta of 1.414. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. 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 StarGlory Holdings, there are three fundamental factors you should assess:

1. Risks: To that end, you should learn about the 2 warning signs we've spotted with StarGlory Holdings (including 1 which is a bit concerning) .
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 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. 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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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.