Estimating The Intrinsic Value Of Yu Tak International Holdings Limited (HKG:8048)

Key Insights

• Yu Tak International Holdings' estimated fair value is HK$0.04 based on 2 Stage Free Cash Flow to Equity
• Yu Tak International Holdings' HK$0.041 share price indicates it is trading at similar levels as its fair value estimate
• The average discount for Yu Tak International Holdings' competitorsis currently 37%

Today we will run through one way of estimating the intrinsic value of Yu Tak International Holdings Limited (HKG:8048) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. 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.

See our latest analysis for Yu Tak International 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.

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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (HK$, Millions)	HK$4.75m	HK$5.19m	HK$5.54m	HK$5.84m	HK$6.09m	HK$6.30m	HK$6.49m	HK$6.66m	HK$6.81m	HK$6.96m
Growth Rate Estimate Source	Est @ 12.23%	Est @ 9.08%	Est @ 6.88%	Est @ 5.34%	Est @ 4.26%	Est @ 3.50%	Est @ 2.97%	Est @ 2.60%	Est @ 2.34%	Est @ 2.16%
Present Value (HK$, Millions) Discounted @ 9.0%	HK$4.4	HK$4.4	HK$4.3	HK$4.1	HK$4.0	HK$3.8	HK$3.5	HK$3.3	HK$3.1	HK$2.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$38m

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 9.0%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = HK$7.0m× (1 + 1.7%) ÷ (9.0%– 1.7%) = HK$97m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$97m÷ ( 1 + 9.0%)¹⁰= HK$41m

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$79m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of HK$0.04, 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.

The 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. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Yu Tak 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 9.0%, which is based on a levered beta of 1.045. 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 Yu Tak International Holdings

Next Steps:

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. 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. For Yu Tak International Holdings, we've put together three further factors you should consider:

1. Risks: For instance, we've identified 3 warning signs for Yu Tak International Holdings (1 can't be ignored) you should be aware of.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.