Stock Analysis

A Look At The Intrinsic Value Of BH Global Corporation Limited (SGX:BQN)

SGX:BQN
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, BH Global fair value estimate is S$0.08
  • Current share price of S$0.07 suggests BH Global is potentially trading close to its fair value
  • The average premium for BH Global's competitorsis currently 1,796%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of BH Global Corporation Limited (SGX:BQN) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for BH Global

The Method

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (SGD, Millions) S$2.97m S$2.52m S$2.26m S$2.11m S$2.03m S$1.99m S$1.97m S$1.97m S$1.98m S$2.00m
Growth Rate Estimate Source Est @ -22.79% Est @ -15.35% Est @ -10.14% Est @ -6.49% Est @ -3.94% Est @ -2.15% Est @ -0.90% Est @ -0.02% Est @ 0.59% Est @ 1.02%
Present Value (SGD, Millions) Discounted @ 9.9% S$2.7 S$2.1 S$1.7 S$1.4 S$1.3 S$1.1 S$1.0 S$0.9 S$0.8 S$0.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$14m

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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 9.9%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = S$2.0m× (1 + 2.0%) ÷ (9.9%– 2.0%) = S$26m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$26m÷ ( 1 + 9.9%)10= S$10m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is S$24m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of S$0.07, the company appears about fair value at a 12% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
SGX:BQN Discounted Cash Flow December 23rd 2023

The 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 BH Global 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 9.9%, which is based on a levered beta of 1.576. 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 BH Global

Strength
  • Debt is not viewed as a risk.
  • Dividends are covered by earnings and cash flows.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Earnings declined over the past year.
Opportunity
  • Current share price is below our estimate of fair value.
  • Lack of analyst coverage makes it difficult to determine BQN's earnings prospects.
Threat
  • No apparent threats visible for BQN.

Next Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For BH Global, there are three important aspects you should explore:

  1. Risks: Every company has them, and we've spotted 5 warning signs for BH Global (of which 1 is potentially serious!) you should know about.
  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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SGX every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether BH Global is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.