the main ideas
- Using the dividend discount model, the fair value estimate for Bright Future Technology Holdings is HK$0.29
- With a share price of HK$0.26, Bright Future Technology Holdings appears to be trading close to its estimated fair value
- Bright Future Technology Holdings' peers appear to be trading at a discount to fair value based on the industry average of 31%.
Today we will do a simple demonstration of the valuation method used to estimate the attractiveness of Bright Future Technology Holdings Limited (HKG:1351) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. Our analysis will use the discounted cash flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually a lot less complicated than you might imagine.
Remember, though, that there are many ways to estimate a company's value, and DCF is only one way. If you still have some burning questions about this type of evaluation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Bright Future Technology Holdings
Step by step through the calculation
Since Bright Future Technology Holdings operates in the media sector, we need to calculate intrinsic value a little differently. In this approach, dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. This often reduces the value of the stock, but it is still good compared to competitors. We use the Gordon Growth Model, which assumes that earnings will grow forever at a rate that can be maintained. Earnings are expected to grow at an annual growth rate equivalent to the 5-year average of the 10-year government bond yield of 2.0%. We then discount this number to the present value with a cost of equity of 8.9%. Compared to the current share price of HK$0.3, the company shows around fair value at a 9.5% discount to where the share price currently trades. Although assessments are imprecise instruments, they are a bit like a telescope – you move a few degrees and you end up in a different galaxy. Do keep this in mind.
Value of stock = expected earnings per share / (discount rate – perpetual growth rate)
= 0.1 CNY / (8.9% – 2.0%)
= 0.3 Hong Kong dollars
Assumptions
We point out that the most important inputs to discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with this result, do the math yourself and play with the assumptions. DCF also does not take into account the potential cyclicality of the industry, or the future capital requirements of the company, so it does not give a complete picture of the company's likely performance. Given that we view Bright Future Technology 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 represents debt. In this calculation, we used 8.9%, which is based on a leverage beta of 1.143. Beta is a measure of a stock's volatility, compared to the market as a whole. We obtain the beta from the industry average beta for globally comparable companies, with an imposed bound between 0.8 and 2.0, which is a reasonable range for stable businesses.
SWOT Analysis of Bright Future Technology Holdings
- Debt is well covered by earnings.
- The dividend is among the top 25% of dividend payers in the market.
- No major weaknesses have been identified for 1351.
- It has enough cash runway for more than 3 years based on current free cash flows.
- The current stock price is below our fair value estimate.
- The lack of analyst coverage makes it difficult to determine 1351's earnings forecasts.
- Debt is not well covered by operating cash flow.
Next steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. Discounted cash flow models are not the be-all and end-all of investment evaluation. Instead, the best use of the discounted cash flow model is to test certain assumptions and theories to see whether they would lead to undervaluing or overvaluing the company. For example, if the final value growth rate is adjusted slightly, it can change the overall result dramatically. For Bright Future Technology Holdings, we've put together three key factors you should consider:
- Risks: Case in point, we've spotted 5 warning signs for Bright Future Technology Holding Company You should be aware of them, and 4 of them are a bit worrying.
- Other high quality alternatives: Do you like a good integrated person? Explore our interactive list of high-quality stocks to get an idea of what you might be missing!
- Other picks from top analysts: Are you interested in knowing what analysts think? Check out our interactive list of analysts' top picks to see which they feel might have an attractive future outlook!
note. Simply Wall St performs a discounted assessment of SEHK's per-share cash flow daily. If you want to find another stock account, just search here.
Evaluation is complex, but we help simplify it.
Find out if Bright Future Technology Holdings may be overvalued 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 analysis
Do you have comments on this article? Concerned about the content? keep in touch With us directly. Alternatively, email the editorial team (at) simplewallst.com.
This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using 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 into account your objectives or financial situation. We aim to offer you focused, long-term analysis driven by fundamental data. Note that our analysis may not take into account a company's most recent price-sensitive announcements or qualitative materials. Simply put, Wall St has no position in any of the stocks mentioned.
