A Look At The Intrinsic Value Of CapitaLand India Trust (SGX:CY6U)

Simply Wall St.01-30

Key Insights The projected fair value for CapitaLand India Trust is S$1.27 based on Dividend Discount Model Current share price of S$1.06 suggests CapitaLand India Trust is potentially trading close...

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This will be done using the Discounted Cash Flow (DCF) model.  Don't get put off by the jargon, the math behind it is actually quite straightforward.  Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation.  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.  View our latest analysis for CapitaLand India Trust  The Method   We have to calculate the value of CapitaLand India Trust slightly differently to other stocks because it is a real estate company.  Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used.  This often underestimates the value of a stock, but it can still be good as a comparison to competitors.  The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever.  For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (2.0%). The expected dividend per share is then discounted to today's value at a cost of equity of 8.9%.  Relative to the current share price of S$1.1, the company appears   about fair value    at a 16% 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. Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)= S$0.09 / (8.9% – 2.0%)= S$1.3SGX:CY6U Discounted Cash Flow January 30th 2024  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 CapitaLand India Trust 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 1.370. 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 CapitaLand India TrustStrength Debt is well covered by earnings. Dividends are covered by earnings and cash flows. Dividend is in the top 25% of dividend payers in the market.  Dividend information for CY6U. Weakness Earnings declined over the past year. Shareholders have been diluted in the past year.Opportunity Annual earnings are forecast to grow faster than the Singaporean market. Good value based on P/E ratio and estimated fair value. ThreatDebt is not well covered by operating cash flow. Revenue is forecast to grow slower than 20% per year. Is CY6U well equipped to handle threats?  Moving On:  Although the valuation of a company is important, 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result.  For CapitaLand India Trust, there are three  important  items  you should look at:   Risks: Be aware that  CapitaLand India Trust is showing  5 warning signs in our investment analysis , and 1 of those is concerning...   Future Earnings: How does CY6U'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. 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.Valuation is complex, but we're helping make it simple.Find out whether CapitaLand India Trust 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.View the Free AnalysisHave 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. 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