Greatview Aseptic Packaging Company Limited (HKG:468) Shares Could Be 49% Below Their Intrinsic Value Estimate
In this article we are going to estimate the intrinsic value of Greatview Aseptic Packaging Company Limited (HKG:468) 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Greatview Aseptic Packaging
The method
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. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
| Levered FCF (CN„, Millions) | CN„435.0m | CN„466.0m | CN„488.8m | CN„507.7m | CN„523.8m | CN„537.8m | CN„550.2m | CN„561.7m | CN„572.4m | CN„582.6m |
| Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ 4.89% | Est @ 3.87% | Est @ 3.16% | Est @ 2.67% | Est @ 2.32% | Est @ 2.08% | Est @ 1.91% | Est @ 1.79% |
| Present Value (CN„, Millions) Discounted @ 6.5% | CN„408 | CN„411 | CN„404 | CN„394 | CN„382 | CN„368 | CN„353 | CN„338 | CN„324 | CN„309 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN„3.7b
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 (1.5%) 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 6.5%.
Terminal Value (TV)= FCF2030 Ă (1 + g) Ă· (r â g) = CN„583mĂ (1 + 1.5%) Ă· (6.5%â 1.5%) = CN„12b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN„12b÷ ( 1 + 6.5%)10= CN„6.3b
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„9.9b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of HK$4.5, the company appears quite undervalued at a 49% 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.
Important 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. 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 Greatview Aseptic Packaging 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 0.803. 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:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for 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. Can we work out why the company is trading at a discount to intrinsic value? For Greatview Aseptic Packaging, there are three pertinent factors you should look at:
- Risks: For example, we've discovered 2 warning signs for Greatview Aseptic Packaging that you should be aware of before investing here.
- Future Earnings: How does 468'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 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. 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.
If you decide to trade Greatview Aseptic Packaging, use the lowest-cost* platform that is rated #1 Overall by Barronâs, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
âą Connect an unlimited number of Portfolios and see your total in one currency
âą Be alerted to new Warning Signs or Risks via email or mobile
âą Track the Fair Value of your stocks
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About SEHK:468
Greatview Aseptic Packaging
An investment holding company, provides packaging solutions to the liquid food industry in the People's Republic of China and internationally.
Flawless balance sheet and fair value.
