A Look At The Intrinsic Value Of CapitaLand Investment Limited (SGX:9CI)

Key Insights

• The projected fair value for CapitaLand Investment is S$3.67 based on 2 Stage Free Cash Flow to Equity
• CapitaLand Investment's S$3.25 share price indicates it is trading at similar levels as its fair value estimate
• Our fair value estimate is 13% lower than CapitaLand Investment's analyst price target of S$4.21

How far off is CapitaLand Investment Limited (SGX:9CI) 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 expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for CapitaLand Investment

The Calculation

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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (SGD, Millions)	-S$507.7m	S$1.57b	S$1.70b	S$1.80b	S$1.89b	S$1.97b	S$2.03b	S$2.09b	S$2.15b	S$2.20b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 7.99%	Est @ 6.18%	Est @ 4.92%	Est @ 4.03%	Est @ 3.41%	Est @ 2.97%	Est @ 2.67%	Est @ 2.46%
Present Value (SGD, Millions) Discounted @ 11%	-S$459	S$1.3k	S$1.3k	S$1.2k	S$1.1k	S$1.1k	S$1.0k	S$941	S$874	S$811

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$9.2b

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 (2.0%) 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 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = S$2.2b× (1 + 2.0%) ÷ (11%– 2.0%) = S$26b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= S$26b÷ ( 1 + 11%)¹⁰= S$9.7b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$19b. 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$3.3, 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 CapitaLand Investment 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 11%, which is based on a levered beta of 1.439. 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 CapitaLand Investment

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For CapitaLand Investment, we've compiled three important items you should further research:

1. Risks: We feel that you should assess the 4 warning signs for CapitaLand Investment (1 is a bit unpleasant!) we've flagged before making an investment in the company.
2. Future Earnings: How does 9CI'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 Singaporean 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.