Blue Moon Group Holdings Limited's (HKG:6993) Intrinsic Value Is Potentially 48% Above Its Share Price

Key Insights

• Blue Moon Group Holdings' estimated fair value is HK$3.07 based on 2 Stage Free Cash Flow to Equity
• Blue Moon Group Holdings is estimated to be 33% undervalued based on current share price of HK$2.07
• Analyst price target for 6993 is HK$2.35 which is 23% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Blue Moon Group Holdings Limited (HKG:6993) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Blue Moon Group Holdings

Crunching The Numbers

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. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (HK$, Millions)	HK$386.0m	HK$549.0m	HK$650.0m	HK$737.6m	HK$811.7m	HK$873.8m	HK$926.0m	HK$970.3m	HK$1.01b	HK$1.04b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 18.39%	Est @ 13.48%	Est @ 10.05%	Est @ 7.65%	Est @ 5.97%	Est @ 4.79%	Est @ 3.96%	Est @ 3.39%
Present Value (HK$, Millions) Discounted @ 6.5%	HK$362	HK$484	HK$537	HK$572	HK$591	HK$597	HK$594	HK$584	HK$570	HK$553

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$5.4b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.5%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = HK$1.0b× (1 + 2.0%) ÷ (6.5%– 2.0%) = HK$24b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$24b÷ ( 1 + 6.5%)¹⁰= HK$13b

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$18b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of HK$2.1, the company appears quite undervalued at a 33% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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 Blue Moon Group 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 6.5%, which is based on a levered beta of 0.800. 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 Blue Moon Group Holdings

Next Steps:

Although the valuation of a company is important, it 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?" 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. Why is the intrinsic value higher than the current share price? For Blue Moon Group Holdings, we've put together three further elements you should look at:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Blue Moon Group Holdings .
2. Future Earnings: How does 6993'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.
3. 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!

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.