Stock Analysis

An Intrinsic Calculation For IGG Inc (HKG:799) Shows It's 38.25% Undervalued

August 04, 2018

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of IGG Inc (HKG:799) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not August 2018 then I highly recommend you check out the latest calculation for IGG by following the link below.

Check out our latest analysis for IGG

What's the value?

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

	2018	2019	2020	2021	2022
Levered FCF ($, Millions)	$209.62	$218.81	$191.27	$209.72	$243.27
Source	Analyst x5	Analyst x5	Analyst x4	Analyst x1	Est @ 16%, capped from 39.61%
Present Value Discounted @ 10.51%	$189.68	$179.16	$141.71	$140.61	$147.59

Present Value of 5-year Cash Flow (PVCF)= US$798.76m

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 an annual growth rate equal to the 10-year government bond rate of 2.2%. We discount this to today's value at a cost of equity of 10.5%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = US$243.27m × (1 + 2.2%) ÷ (10.5% – 2.2%) = US$2.99b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = US$2.99b ÷ ( 1 + 10.5%)⁵ = US$1.82b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.61b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of $2. However, 799’s primary listing is in Singapore, and 1 share of 799 in USD represents 7.849 ( USD/ HKD) share of SEHK:799, so the intrinsic value per share in HKD is HK$15.71. Compared to the current share price of HK$9.7, the stock is quite undervalued at a 38.25% discount to what it is available for right now.

SEHK:799 Intrinsic Value Export August 5th 18

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at IGG as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I've used 10.5%, which is based on a levered beta of 1.066. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For 799, I've compiled three essential aspects you should further research:

Financial Health: Does 799 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does 799'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: Are there other high quality stocks you could be holding instead of 799? 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 does a DCF calculation for every HK stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.