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- Using the 2 Stage Free Cash Flow to Equity, China Resources Mixc Lifestyle Services fair value estimate is HK$42.39
- Current share price of HK$41.70 suggests China Resources Mixc Lifestyle Services is potentially trading close to its fair value
- Analyst price target for 1209 is CN¥50.28, which is 19% above our fair value estimate
Does the March share price for China Resources Mixc Lifestyle Services Limited (HKG:1209) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to today’s value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don’t get put off by the jargon, the math behind it is actually quite straightforward.
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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for China Resources Mixc Lifestyle Services
We’re using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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, and so the sum of these future cash flows is then discounted to today’s value:
10-year free cash flow (FCF) forecast
|Levered FCF (CN¥, Millions)||CN¥3.26b||CN¥4.00b||CN¥5.05b||CN¥5.74b||CN¥6.43b||CN¥6.93b||CN¥7.35b||CN¥7.69b||CN¥7.99b||CN¥8.24b|
|Growth Rate Estimate Source||Analyst x2||Analyst x2||Analyst x1||Analyst x1||Analyst x1||Est @ 7.82%||Est @ 6.00%||Est @ 4.72%||Est @ 3.83%||Est @ 3.20%|
|Present Value (CN¥, Millions) Discounted @ 9.1%||CN¥3.0k||CN¥3.4k||CN¥3.9k||CN¥4.0k||CN¥4.2k||CN¥4.1k||CN¥4.0k||CN¥3.8k||CN¥3.6k||CN¥3.4k|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥37b
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 (1.7%) 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 9.1%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CN¥8.2b× (1 + 1.7%) ÷ (9.1%– 1.7%) = CN¥114b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥114b÷ ( 1 + 9.1%)10= CN¥47b
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 CN¥85b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of HK$41.7, the company appears about fair value at a 1.6% discount to where the stock price trades currently. 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.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 China Resources Mixc Lifestyle Services 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 9.1%, which is based on a levered beta of 1.031. 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 China Resources Mixc Lifestyle Services
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Real Estate market.
- Annual earnings are forecast to grow faster than the Hong Kong market.
- Current share price is below our estimate of fair value.
- No apparent threats visible for 1209.
Although the valuation of a company is important, it ideally won’t be the sole piece of analysis you scrutinize for a company. It’s not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 China Resources Mixc Lifestyle Services, we’ve compiled three important aspects you should further examine:
- Financial Health: Does 1209 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.
- Future Earnings: How does 1209’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.
- 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!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK 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 China Resources Mixc Lifestyle Services 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.