Calculation of the fair value of Mulsanne Group Holding Limited (HKG: 1817)

Today we are going to review a valuation method used to estimate the attractiveness of Mulsanne Group Holding Limited (HKG: 1817) as an investment opportunity by estimating the company’s future cash flows and by discounting them to their current value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.

We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.

Discover our latest analysis for Mulsanne Group Holding

The calculation

We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. To begin with, we need to estimate the next ten years of cash flow. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. 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 down more in the early years than in subsequent years.

In general, we assume that a dollar today is worth more 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) estimate

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Leverage FCF (CN ¥, Million) CN ¥ 172.7m CN ¥ 209.5m CN ¥ 241.7m CN ¥ 268.8m CN ¥ 291.0m CN ¥ 309.2m CN ¥ 324.1m CN ¥ 336.4m CN ¥ 346.9m CN ¥ 356.0m
Source of estimated growth rate Est @ 29.81% East @ 21.31% Est @ 15.36% East @ 11.2% East @ 8.28% Est @ 6.24% Est @ 4.81% Est @ 3.81% Est @ 3.11% East @ 2.62%
Present value (CN ¥, Million) discounted at 8.9% CN ¥ 159 CN177 CN ¥ 187 CN ¥ 191 CN ¥ 190 CN ¥ 185 CN ¥ 178 CN ¥ 170 CN ¥ 161 CN ¥ 152

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = CN ¥ 1.7b

The second stage is also known as terminal value, this 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 their present value, using a cost of equity of 8.9%.

Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = CN ¥ 356m × (1 + 1.5%) ÷ (8.9% – 1.5%) = CN ¥ 4.9b

Present value of terminal value (PVTV)= TV / (1 + r)ten= CN ¥ 4.9b ÷ (1 + 8.9%)ten= CN ¥ 2.1b

Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is CN ¥ 3.8b. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of HK $ 5.8, the company appears to be around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.

SEHK: 1817 Discounted cash flows June 2, 2021

The hypotheses

We would like to stress that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the 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 full picture of a company’s potential performance. Since we consider Mulsanne Group Holding 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 8.9%, which is based on a leveraged beta of 1.376. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Next steps:

While valuing a business is important, it’s just one of the many factors you need to assess for a business. DCF models are not the ultimate solution for investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Mulsanne Group Holding, you need to assess three other factors:

  1. Risks: As an example, we have found 3 warning signs for Mulsanne Group Holding (2 cannot be ignored!) Which you should consider before investing here.
  2. Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
  3. Other picks from top analysts: Interested in seeing what analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think might have a compelling outlook for the future!

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.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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