Calculating The Fair Value Of SSY Group Limited (HKG:2005)

Simply Wall St.12-19

Key Insights Using the 2 Stage Free Cash Flow to Equity, SSY Group fair value estimate is HK$3.31 With HK$3.41 share price, SSY Group appears to be trading close to its estimated fair value Our ...

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This will be done using the Discounted Cash Flow (DCF) model.  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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.  See our latest analysis for SSY Group  Crunching The Numbers   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.   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.   A DCF is all about the idea that a dollar in the future is less valuable than a dollar today,  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  2025 2026 2027 2028 2029 2030 2031 2032 2033 2034  Levered FCF (HK$, Millions)  HK$1.14b HK$1.11b HK$575.3m HK$582.0m HK$480.7m HK$425.5m HK$394.3m HK$376.8m HK$367.8m HK$364.2m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x1 Analyst x1 Est @ -17.40% Est @ -11.48% Est @ -7.33% Est @ -4.43% Est @ -2.40% Est @ -0.98%  Present Value (HK$, Millions) Discounted @ 6.2%  HK$1.1k HK$986 HK$480 HK$457 HK$356 HK$296 HK$258 HK$233 HK$214 HK$199 (\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = HK$4.5b After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (2.3%) 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 6.2%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = HK$364m× (1 + 2.3%) ÷ (6.2%– 2.3%) = HK$9.6bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= HK$9.6b÷ ( 1 + 6.2%)10= HK$5.3b 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 HK$9.8b.  In the final step we divide the equity value by the number of shares outstanding.  Compared to the current share price of HK$3.4, 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. SEHK:2005 Discounted Cash Flow December 19th 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 SSY Group 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 6.2%, 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 SSY GroupStrength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Balance sheet summary for 2005. Weakness Dividend is low compared to the top 25% of dividend payers in the Pharmaceuticals market.Opportunity Annual revenue is forecast to grow faster than the Hong Kong market. Good value based on P/E ratio compared to estimated Fair P/E ratio.  Significant insider buying over the past 3 months.Threat Dividends are not covered by cash flow.  Annual earnings are forecast to grow slower than the Hong Kong market.  See 2005's dividend history.  Moving On:  Valuation is only one side of the coin in terms of building your investment thesis, and it  is only one of many factors that you need to assess for a company.  DCF models are not the be-all and end-all of investment valuation.  Rather it should be seen as a guide to \"what assumptions need to be true for this stock to be under/overvalued?\"  For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation.  For SSY Group, there are three  additional  factors  you should look at:   Risks: You should be aware of the 1 warning sign for SSY Group we've uncovered before considering an investment in the company.   Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 2005's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.  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. Simply Wall St updates its DCF calculation for every Hong Kong stock every day, so if you want to find the intrinsic value of any other stock just search here.New: Manage All Your Stock Portfolios in One PlaceWe've created the ultimate portfolio companion for stock investors, and it's free.• Connect an unlimited number of Portfolios and see your total in one currency• Be alerted to new Warning Signs or Risks via email or mobile• Track the Fair Value of your stocksTry a Demo Portfolio for FreeHave 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.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2492258118"}