Is WEILONG Delicious Global Holdings Ltd (HKG:9985) Trading At A 21% Discount?

Simply Wall St.06-18

Key Insights Using the 2 Stage Free Cash Flow to Equity, WEILONG Delicious Global Holdings fair value estimate is HK$7.67 WEILONG Delicious Global Holdings is estimated to be 21% undervalued based ...

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We will take advantage of the Discounted Cash Flow (DCF) model for this purpose.  Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.  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.  See our latest analysis for WEILONG Delicious Global Holdings  Is WEILONG Delicious Global Holdings Fairly Valued?   We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period.  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.   Generally we assume that a dollar today is more valuable than a dollar in the future,  so we discount the value of these future cash flows to their estimated value in today's dollars:  10-year free cash flow (FCF) forecast  2024 2025 2026 2027 2028 2029 2030 2031 2032 2033  Levered FCF (CN¥, Millions)  CN¥845.6m CN¥829.3m CN¥823.4m CN¥824.7m CN¥830.9m CN¥840.6m CN¥852.9m CN¥867.2m CN¥882.9m CN¥899.8m Growth Rate Estimate Source Est @ -3.67% Est @ -1.93% Est @ -0.70% Est @ 0.15% Est @ 0.75% Est @ 1.17% Est @ 1.46% Est @ 1.67% Est @ 1.81% Est @ 1.91%  Present Value (CN¥, Millions) Discounted @ 6.7%  CN¥793 CN¥729 CN¥679 CN¥637 CN¥602 CN¥571 CN¥543 CN¥518 CN¥494 CN¥472 (\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥6.0b The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.7%. Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥900m× (1 + 2.2%) ÷ (6.7%– 2.2%) = CN¥20bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥20b÷ ( 1 + 6.7%)10= CN¥11b 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¥17b.  To get the intrinsic value per share, we divide this by the total number of shares outstanding.  Compared to the current share price of HK$6.1, the company appears   a touch undervalued    at a 21% 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. SEHK:9985 Discounted Cash Flow June 17th 2024  The 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.  Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 WEILONG Delicious Global 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 6.7%, which is based on a levered beta of 0.800. 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 WEILONG Delicious Global HoldingsStrength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Dividends are covered by earnings and cash flows.  Dividend information for 9985. Weakness Dividend is low compared to the top 25% of dividend payers in the Food market.Opportunity Annual earnings are forecast to grow faster than the Hong Kong market. Good value based on P/E ratio and estimated fair value. Threat Revenue is forecast to grow slower than 20% per year.  What else are analysts forecasting for 9985?  Next Steps:  Whilst important, the DCF calculation  is only one of many factors that you need to assess for a company.  The DCF model is not a perfect stock valuation tool.  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.  For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation.   What is the reason for the share price sitting below the intrinsic value?   For WEILONG Delicious Global Holdings, there are three  pertinent  factors  you should assess:   Risks: To that end, you should be aware of the   1 warning sign  we've spotted with WEILONG Delicious Global Holdings .  Future Earnings: How does 9985'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 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!   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 WEILONG Delicious Global Holdings 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. Simply Wall St has no position in any stocks mentioned.Valuation is complex, but we're helping make it simple.Find out whether WEILONG Delicious Global Holdings 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. 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