Key Insights
- Using the 2 Stage Free Cash Flow to Equity, New Provenance Everlasting Holdings fair value estimate is HK$0.0097
- Current share price of HK$0.011 suggests New Provenance Everlasting Holdings is potentially trading close to its fair value
- Industry average of 167% suggests New Provenance Everlasting Holdings' peers are currently trading at a higher premium to fair value
Today we will run through one way of estimating the intrinsic value of New Provenance Everlasting Holdings Limited (HKG:2326) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for New Provenance Everlasting Holdings
The Calculation
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. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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
| 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
| Levered FCF (HK$, Millions) | HK$10.9m | HK$11.1m | HK$11.4m | HK$11.7m | HK$12.0m | HK$12.2m | HK$12.5m | HK$12.8m | HK$13.2m | HK$13.5m |
| Growth Rate Estimate Source | Est @ 2.28% | Est @ 2.33% | Est @ 2.36% | Est @ 2.38% | Est @ 2.40% | Est @ 2.41% | Est @ 2.42% | Est @ 2.43% | Est @ 2.43% | Est @ 2.43% |
| Present Value (HK$, Millions) Discounted @ 7.7% | HK$10.1 | HK$9.6 | HK$9.1 | HK$8.7 | HK$8.2 | HK$7.8 | HK$7.4 | HK$7.1 | HK$6.7 | HK$6.4 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$81m
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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = HK$13m× (1 + 2.4%) ÷ (7.7%– 2.4%) = HK$261m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= HK$261m÷ ( 1 + 7.7%)10= HK$124m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is HK$205m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of HK$0.01, 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.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 New Provenance Everlasting Holdings 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 7.7%, which is based on a levered beta of 1.033. 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 New Provenance Everlasting Holdings
- Currently debt free.
- Current share price is above our estimate of fair value.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Lack of analyst coverage makes it difficult to determine 2326's earnings prospects.
- No apparent threats visible for 2326.
Looking Ahead:
Whilst important, the DCF calculation 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For New Provenance Everlasting Holdings, we've put together three further elements you should consider:
- Risks: For example, we've discovered 2 warning signs for New Provenance Everlasting Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
- 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!
- 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 SEHK every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.