- Hong Kong
- Real Estate
Estimating The Intrinsic Value Of Powerlong Commercial Management Holdings Limited (HKG:9909)
- Powerlong Commercial Management Holdings' estimated fair value is HK$4.66 based on 2 Stage Free Cash Flow to Equity
- Powerlong Commercial Management Holdings' HK$5.11 share price indicates it is trading at similar levels as its fair value estimate
- The CN¥6.63 analyst price target for 9909 is 42% more than our estimate of fair value
In this article we are going to estimate the intrinsic value of Powerlong Commercial Management Holdings Limited (HKG:9909) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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.
View our latest analysis for Powerlong Commercial Management Holdings
Step By Step Through The Calculation
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. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
|Levered FCF (CN¥, Millions)||CN¥272.0m||CN¥255.0m||CN¥245.8m||CN¥240.8m||CN¥238.7m||CN¥238.4m||CN¥239.5m||CN¥241.5m||CN¥244.2m||CN¥247.4m|
|Growth Rate Estimate Source||Analyst x2||Analyst x2||Est @ -3.62%||Est @ -2.01%||Est @ -0.89%||Est @ -0.10%||Est @ 0.45%||Est @ 0.84%||Est @ 1.11%||Est @ 1.30%|
|Present Value (CN¥, Millions) Discounted @ 10%||CN¥247||CN¥210||CN¥183||CN¥163||CN¥147||CN¥133||CN¥121||CN¥111||CN¥102||CN¥93.3|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.5b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (1.7%) 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 10%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CN¥247m× (1 + 1.7%) ÷ (10%– 1.7%) = CN¥3.0b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥3.0b÷ ( 1 + 10%)10= CN¥1.1b
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¥2.6b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of HK$5.1, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Powerlong Commercial Management 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 10%, which is based on a levered beta of 1.187. 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 Powerlong Commercial Management Holdings
- Earnings growth over the past year exceeded the industry.
- Currently debt free.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings growth over the past year is below its 5-year average.
- Expensive based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow faster than the Hong Kong market.
- Annual earnings are forecast to grow slower than the Hong Kong market.
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 Powerlong Commercial Management Holdings, there are three pertinent items you should look at:
- Risks: To that end, you should be aware of the 2 warning signs we've spotted with Powerlong Commercial Management Holdings .
- Future Earnings: How does 9909'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.
Valuation is complex, but we're helping make it simple.
Find out whether Powerlong Commercial Management Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Powerlong Commercial Management Holdings
Powerlong Commercial Management Holdings Limited, together with its subsidiaries, engages in commercial operational and residential property management businesses in the People’s Republic of China.
Flawless balance sheet with proven track record.