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A look at the fair value of C-Link Squared Limited (HKG: 1463)

In this article, we will estimate the intrinsic value of C-Link Squared Limited (HKG:1463) by estimating the company’s future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. This may sound complicated, but it’s actually quite simple!

Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. If you still have burning questions about this type of assessment, take a look at the Simply Wall St Analysis Template.

See our latest analysis for C-Link Squared

What is the estimated valuation?

We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimate of free cash flow is available, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

Generally, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:

10-Year Free Cash Flow (FCF) Forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF (MYR, Millions) RM30.2m RM35.8m RM40.5m RM44.5m RM47.7m RM50.4m RM52.5m RM54.4m RM55.9m RM57.3m
Growth rate estimate Source Is at 25.61% Is at 18.37% Is at 13.31% Is at 9.76% Is at 7.27% Is at 5.54% Is at 4.32% Is at 3.47% Is at 2.87% Is at 2.45%
Present value (MYR, millions) discounted at 6.9% RM28.3 RM31.3 RM33.2 RM34.1 RM34.2 RM33.7 RM32.9 RM31.9 RM30.7 RM29.4

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = RM319m

The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.5%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 6.9%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = RM57m × (1 + 1.5%) ÷ (6.9%– 1.5%) = RM1.1b

Present value of terminal value (PVTV)= TV / (1 + r)ten= RM1.1b÷ ( 1 + 6.9%)ten= RM550m

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is RM869 million. The final step is to divide the equity value by the number of shares outstanding. Against the current share price of HK$2.1, the company appears around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.

SEHK: 1463 Discounted Cash Flow May 27, 2022

Important assumptions

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 view C-Link Squared 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 factors in debt. In this calculation, we used 6.9%, which is based on a leveraged beta of 0.999. 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.

Next steps:

While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. For C-Link Squared, we have compiled three relevant factors that you should consider in more detail:

  1. Risks: For example, we discovered 3 warning signs for C-Link Squared (1 is a bit worrying!) which you should be aware of before investing here.
  2. Management:Did insiders increase their shares to take advantage of market sentiment about 1463’s future prospects? View our management and board analysis with insights into CEO compensation and governance factors.
  3. 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. The Simply Wall St app performs an updated cash flow valuation for each SEHK stock every day. If you want to find the calculation for other stocks, search here.

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.