Does the April share price for Miramar Hospitality Co.,Ltd (GTSM:2730) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
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. 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) forecast
|Levered FCF (NT$, Millions)||NT$32.7m||NT$32.4m||NT$32.2m||NT$32.2m||NT$32.2m||NT$32.4m||NT$32.5m||NT$32.7m||NT$33.0m||NT$33.2m|
|Growth Rate Estimate Source||Est @ -1.8%||Est @ -1.01%||Est @ -0.46%||Est @ -0.07%||Est @ 0.2%||Est @ 0.39%||Est @ 0.52%||Est @ 0.61%||Est @ 0.68%||Est @ 0.72%|
|Present Value (NT$, Millions) Discounted @ 13%||NT$28.9||NT$25.3||NT$22.3||NT$19.7||NT$17.4||NT$15.5||NT$13.8||NT$12.3||NT$10.9||NT$9.7|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NT$175m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 (0.8%) 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 13%.
Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = NT$33m× (1 + 0.8%) ÷ (13%– 0.8%) = NT$273m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NT$273m÷ ( 1 + 13%)10= NT$80m
The total value is the sum…
Go to the news source: A Look At The Intrinsic Value Of Miramar Hospitality Co.,Ltd (GTSM:2730)