A Look At The Fair Value Of CapitaLand Limited (SGX:C31)

Does the November share price for CapitaLand Limited (SGX:C31) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the expected future cash flows and discounting them to today’s value. I will be using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not November 2018 then I highly recommend you check out the latest calculation for CapitaLand by following the link below.

View our latest analysis for CapitaLand

The model

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2019 2020 2021 2022 2023
Levered FCF (SGD, Millions) SGD1.51k SGD876.42 SGD956.29 SGD1.04k SGD1.14k
Source Analyst x5 Analyst x3 Est @ 9.11% Est @ 9.11% Est @ 9.11%
Present Value Discounted @ 11.33% SGD1.36k SGD707.15 SGD693.10 SGD679.32 SGD665.82

Present Value of 5-year Cash Flow (PVCF)= S$4.1b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.6%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 11.3%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = S$1.1b × (1 + 2.6%) ÷ (11.3% – 2.6%) = S$13b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = S$13b ÷ ( 1 + 11.3%)5 = S$7.8b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is S$12b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of SGD2.76. Compared to the current share price of SGD3.17, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

SGX:C31 Intrinsic Value Export November 29th 18
SGX:C31 Intrinsic Value Export November 29th 18

The assumptions

I’d like to 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at CapitaLand as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.3%, which is based on a levered beta of 1.178. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For C31, there are three important aspects you should look at:

  1. Financial Health: Does C31 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does C31’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: Are there other high quality stocks you could be holding instead of C31? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the SGX every 6 hours. If you want to find the calculation for other stocks just search 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 editorial-team@simplywallst.com.