A Look At The Fair Value Of Celestial Asia Securities Holdings Limited (HKG:1049)

Key Insights

• The projected fair value for Celestial Asia Securities Holdings is HK$1.32 based on 2 Stage Free Cash Flow to Equity
• With HK$1.12 share price, Celestial Asia Securities Holdings appears to be trading close to its estimated fair value
• Celestial Asia Securities Holdings' peers are currently trading at a premium of 59% on average

In this article we are going to estimate the intrinsic value of Celestial Asia Securities Holdings Limited (HKG:1049) by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Celestial Asia Securities Holdings

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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (HK$, Millions)	HK$19.7m	HK$15.8m	HK$13.8m	HK$12.6m	HK$12.0m	HK$11.6m	HK$11.4m	HK$11.4m	HK$11.4m	HK$11.5m
Growth Rate Estimate Source	Est @ -28.76%	Est @ -19.49%	Est @ -13.00%	Est @ -8.45%	Est @ -5.27%	Est @ -3.04%	Est @ -1.49%	Est @ -0.40%	Est @ 0.37%	Est @ 0.90%
Present Value (HK$, Millions) Discounted @ 13%	HK$17.4	HK$12.4	HK$9.5	HK$7.7	HK$6.5	HK$5.5	HK$4.8	HK$4.2	HK$3.8	HK$3.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$75m

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. 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = HK$12m× (1 + 2.2%) ÷ (13%– 2.2%) = HK$107m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$107m÷ ( 1 + 13%)¹⁰= HK$31m

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$107m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of HK$1.1, the company appears about fair value at a 15% discount to where the stock price trades currently. 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.

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 Celestial Asia Securities 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.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Celestial Asia Securities Holdings, we've compiled three further aspects you should further research:

1. Risks: As an example, we've found 2 warning signs for Celestial Asia Securities Holdings 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. 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.