Is Horizon Robotics (HKG:9660) Expensive For A Reason? A Look At Its Intrinsic Value

Key Insights

• Horizon Robotics' estimated fair value is HK$4.36 based on 2 Stage Free Cash Flow to Equity
• Current share price of HK$5.29 suggests Horizon Robotics is potentially 21% overvalued
• The CN¥9.92 analyst price target for 9660 is 127% more than our estimate of fair value

How far off is Horizon Robotics (HKG:9660) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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.

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Is Horizon Robotics Fairly Valued?

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, 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	-CN¥2.71b	-CN¥1.55b	CN¥960.9m	CN¥1.80b	CN¥2.68b	CN¥3.38b	CN¥4.02b	CN¥4.59b	CN¥5.07b	CN¥5.48b
Growth Rate Estimate Source	Analyst x3	Analyst x3	Analyst x1	Analyst x2	Analyst x1	Est @ 26.06%	Est @ 18.98%	Est @ 14.02%	Est @ 10.54%	Est @ 8.11%
Present Value (CN¥, Millions) Discounted @ 8.4%	-CN¥2.5k	-CN¥1.3k	CN¥755	CN¥1.3k	CN¥1.8k	CN¥2.1k	CN¥2.3k	CN¥2.4k	CN¥2.5k	CN¥2.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥12b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.4%) 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 8.4%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥5.5b× (1 + 2.4%) ÷ (8.4%– 2.4%) = CN¥95b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥95b÷ ( 1 + 8.4%)¹⁰= CN¥43b

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¥54b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of HK$5.3, the company appears slightly overvalued 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

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Horizon Robotics 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 8.4%, which is based on a levered beta of 1.122. 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.

Check out our latest analysis for Horizon Robotics

SWOT Analysis for Horizon Robotics

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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. Why is the intrinsic value lower than the current share price? For Horizon Robotics, we've put together three further elements you should assess:

1. Risks: Take risks, for example - Horizon Robotics has 1 warning sign we think you should be aware of.
2. Future Earnings: How does 9660'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.
3. 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.

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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.