A Look At The Fair Value Of Veeko International Holdings Limited (HKG:1173)

Key Insights

• Veeko International Holdings' estimated fair value is HK$0.04 based on 2 Stage Free Cash Flow to Equity
• Current share price of HK$0.047 suggests Veeko International Holdings is potentially trading close to its fair value
• Industry average of 48% suggests Veeko International Holdings' peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of Veeko International Holdings Limited (HKG:1173) 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Veeko International Holdings

The Calculation

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.

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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (HK$, Millions)	HK$17.7m	HK$14.0m	HK$12.0m	HK$10.9m	HK$10.3m	HK$9.95m	HK$9.80m	HK$9.76m	HK$9.80m	HK$9.89m
Growth Rate Estimate Source	Est @ -31.08%	Est @ -21.05%	Est @ -14.03%	Est @ -9.12%	Est @ -5.68%	Est @ -3.28%	Est @ -1.59%	Est @ -0.41%	Est @ 0.41%	Est @ 0.99%
Present Value (HK$, Millions) Discounted @ 12%	HK$15.8	HK$11.1	HK$8.5	HK$6.9	HK$5.8	HK$5.0	HK$4.4	HK$3.9	HK$3.5	HK$3.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$68m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = HK$9.9m× (1 + 2.3%) ÷ (12%– 2.3%) = HK$104m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$104m÷ ( 1 + 12%)¹⁰= HK$33m

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$102m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of HK$0.05, 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.

Important Assumptions

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 Veeko International 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 12%, 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.

SWOT Analysis for Veeko International Holdings

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Veeko International Holdings, we've compiled three relevant aspects you should assess:

1. Risks: We feel that you should assess the 2 warning signs for Veeko International Holdings (1 is potentially serious!) we've flagged before making an investment in the company.
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.

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.