How far is Beijing Enterprises Urban Resources Group Limited (HKG:3718) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking expected future cash flows and discounting them to their present value. One way to do this is to use the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
Check out our latest analysis for Beijing Enterprises Urban Resources Group
What is the estimated valuation?
We have to calculate the value of Beijing Enterprises Urban Resources Group slightly differently than other stocks because it is a business services company. Instead of using free cash flow, which is difficult to estimate and often not reported by industry analysts, dividend payments per share (DPS) are used. This often underestimates the value of a stock, but it can still be a good comparison against competitors. The “Gordon Growth Model” is used, which simply assumes that dividend payments will continue to increase at a sustainable rate of growth forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year government bond yield of 1.5%. We then discount this figure to present value at a cost of equity of 6.6%. Compared to the current share price of HK$0.8, the company looks potentially overvalued at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)
= HK$0.03 / (6.6% – 1.5%)
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Beijing Enterprises Urban Resources 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 takes debt into account . In this calculation, we used 6.6%, which is based on a leveraged beta of 1.062. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. The DCF model is not a perfect stock valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Why is intrinsic value lower than the current stock price? For Beijing Enterprises Urban Resources Group, you need to assess three relevant elements:
- Risks: Every business has them, and we’ve spotted 2 warning signs for Beijing Enterprises Urban Resources Group you should know.
- Future earnings: How does the growth rate of 3718 compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. Simply Wall St updates its DCF calculation for every Hong Kong stock daily, so if you want to find the intrinsic value of any other stock, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.