Estimating The Intrinsic Value Of Asia Cassava Resources Holdings Limited (HKG:841)

Key Insights

• Asia Cassava Resources Holdings' estimated fair value is HK$0.10 based on 2 Stage Free Cash Flow to Equity
• Asia Cassava Resources Holdings' HK$0.11 share price indicates it is trading at similar levels as its fair value estimate
• The average discount for Asia Cassava Resources Holdings' competitorsis currently 46%

In this article we are going to estimate the intrinsic value of Asia Cassava Resources Holdings Limited (HKG:841) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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.

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Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (HK$, Millions)	HK$24.2m	HK$11.4m	HK$7.25m	HK$5.47m	HK$4.57m	HK$4.08m	HK$3.80m	HK$3.65m	HK$3.58m	HK$3.56m
Growth Rate Estimate Source	Est @ -76.80%	Est @ -52.98%	Est @ -36.31%	Est @ -24.64%	Est @ -16.47%	Est @ -10.75%	Est @ -6.75%	Est @ -3.95%	Est @ -1.99%	Est @ -0.61%
Present Value (HK$, Millions) Discounted @ 13%	HK$21.5	HK$8.9	HK$5.0	HK$3.4	HK$2.5	HK$2.0	HK$1.6	HK$1.4	HK$1.2	HK$1.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$49m

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 (2.6%) 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 13%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = HK$3.6m× (1 + 2.6%) ÷ (13%– 2.6%) = HK$36m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$36m÷ ( 1 + 13%)¹⁰= HK$11m

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$59m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of HK$0.1, the company appears around fair value at the time of writing. 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.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Asia Cassava Resources 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 13%, which is based on a levered beta of 2.000. 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.

See our latest analysis for Asia Cassava Resources Holdings

SWOT Analysis for Asia Cassava Resources Holdings

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Asia Cassava Resources Holdings, we've put together three additional items you should explore:

1. Risks: As an example, we've found 4 warning signs for Asia Cassava Resources Holdings (3 make us uncomfortable!) that you need to consider before investing here.
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. 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.

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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.