Estimating The Fair Value Of COSCO SHIPPING International (Singapore) Co., Ltd. (SGX:F83)

Key Insights

• The projected fair value for COSCO SHIPPING International (Singapore) is S$0.12 based on 2 Stage Free Cash Flow to Equity
• Current share price of S$0.14 suggests COSCO SHIPPING International (Singapore) is potentially trading close to its fair value
• COSCO SHIPPING International (Singapore)'s peers are currently trading at a discount of 30% on average

Today we will run through one way of estimating the intrinsic value of COSCO SHIPPING International (Singapore) Co., Ltd. (SGX:F83) by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for COSCO SHIPPING International (Singapore)

Is COSCO SHIPPING International (Singapore) Fairly Valued?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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$23.6m	S$22.1m	S$21.2m	S$20.8m	S$20.6m	S$20.6m	S$20.7m	S$20.9m	S$21.2m	S$21.5m
Growth Rate Estimate Source	Est @ -10.08%	Est @ -6.45%	Est @ -3.91%	Est @ -2.13%	Est @ -0.89%	Est @ -0.01%	Est @ 0.60%	Est @ 1.02%	Est @ 1.32%	Est @ 1.53%
Present Value (SGD, Millions) Discounted @ 8.9%	S$21.7	S$18.6	S$16.4	S$14.8	S$13.4	S$12.3	S$11.4	S$10.6	S$9.8	S$9.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$138m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 8.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = S$22m× (1 + 2.0%) ÷ (8.9%– 2.0%) = S$318m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= S$318m÷ ( 1 + 8.9%)¹⁰= S$136m

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$274m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of S$0.1, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Important Assumptions

We would 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 these result, have a go at the calculation yourself and play with the 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 COSCO SHIPPING International (Singapore) 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 8.9%, which is based on a levered beta of 1.378. 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 COSCO SHIPPING International (Singapore)

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For COSCO SHIPPING International (Singapore), we've put together three pertinent factors you should further examine:

1. Risks: For example, we've discovered 1 warning sign for COSCO SHIPPING International (Singapore) that you should be aware of before investing here.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.