A Look At The Fair Value Of Labixiaoxin Snacks Group Limited (HKG:1262)

Key Insights

• The projected fair value for Labixiaoxin Snacks Group is HK$0.19 based on 2 Stage Free Cash Flow to Equity
• With HK$0.19 share price, Labixiaoxin Snacks Group appears to be trading close to its estimated fair value
• The average discount for Labixiaoxin Snacks Group's competitorsis currently 30%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Labixiaoxin Snacks Group Limited (HKG:1262) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Labixiaoxin Snacks Group

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. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥16.0m	CN¥16.7m	CN¥17.3m	CN¥17.8m	CN¥18.3m	CN¥18.7m	CN¥19.2m	CN¥19.6m	CN¥20.0m	CN¥20.4m
Growth Rate Estimate Source	Est @ 5.39%	Est @ 4.34%	Est @ 3.60%	Est @ 3.08%	Est @ 2.72%	Est @ 2.47%	Est @ 2.29%	Est @ 2.17%	Est @ 2.08%	Est @ 2.02%
Present Value (CN¥, Millions) Discounted @ 9.1%	CN¥14.6	CN¥14.0	CN¥13.3	CN¥12.5	CN¥11.8	CN¥11.1	CN¥10.4	CN¥9.7	CN¥9.1	CN¥8.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥115m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (1.9%) 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 9.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥20m× (1 + 1.9%) ÷ (9.1%– 1.9%) = CN¥286m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥286m÷ ( 1 + 9.1%)¹⁰= CN¥119m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥234m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of HK$0.2, 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.

The Assumptions

We would point out that 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 Labixiaoxin Snacks Group 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 9.1%, which is based on a levered beta of 1.197. 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 Labixiaoxin Snacks Group

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for 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?" 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 Labixiaoxin Snacks Group, we've put together three relevant elements you should consider:

1. Risks: We feel that you should assess the 1 warning sign for Labixiaoxin Snacks Group we've flagged before making an investment in the company.
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.