China Merchants Port Holdings Company Limited (HKG:144) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the marine ports and services industry, China Merchants Port Holdings is currently valued at HK$53.33b. Today we will examine China Merchants Port Holdings’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
What is free cash flow?Free cash flow (FCF) is the amount of cash China Merchants Port Holdings has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations. I will be analysing China Merchants Port Holdings’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
China Merchants Port Holdings’s yield of 6.23% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock China Merchants Port Holdings is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does China Merchants Port Holdings have a favourable cash flow trend?Can China Merchants Port Holdings improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, China Merchants Port Holdings’s operating cash flows is expected to grow by a double-digit 95.70%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of China Merchants Port Holdings’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||HK$5.76b||HK$7.88b||HK$7.68b||HK$11.27b|
|OCF Growth Year-On-Year||36.82%||-2.45%||46.63%|
|OCF Growth From Current Year||33.47%||95.70%|
High operating cash flow growth is a positive indication for China Merchants Port Holdings’s future, which means it may be able to sustain the current cash yield. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Now you know to keep cash flows in mind, I recommend you continue to research China Merchants Port Holdings to get a better picture of the company by looking at:
- Valuation: What is 144 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 144 is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on China Merchants Port Holdings’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks 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 firstname.lastname@example.org.