Hutchison Telecommunications Hong Kong Holdings Limited’s (HKG:215) Intrinsic Value Is Potentially 43% Above Its Share Price


Does the September share price for Hutchison Telecommunications Hong Kong Holdings Limited (HKG:215) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to today’s value. Our analysis will employ 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.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Hutchison Telecommunications Hong Kong Holdings

What’s The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. 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.

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) estimate

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (HK$, Millions) HK$452.0m HK$605.0m HK$489.7m HK$426.7m HK$390.2m HK$368.7m HK$356.2m HK$349.4m HK$346.3m HK$345.8m
Growth Rate Estimate Source Analyst x1 Analyst x1 Is @ -19.05% Est @ -12.87% Is @ -8.55% Is @ -5.52% Is @ -3.4% Est @ -1.91% Est @ -0.87% Est @ -0.15%
Present Value (HK$, Millions) Discounted @ 5.4% HK$429 HK$544 HK$418 HK$345 HK$300 HK$269 HK$246 HK$229 HK$215 HK$204

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$3.2b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (1.6%) 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 5.4%.

Value Terminal (TV)= FCF2032 × (1 + g) ÷ (r – g) = HK$346m× (1 + 1.6%) ÷ (5.4%– 1.6%) = HK$9.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= HK$9.1b÷ (1 + 5.4%)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$8.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of HK$1.2, the company appears quite good value at a 30% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.

SEHK:215 Discounted Cash Flow September 26th 2022

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Hutchison Telecommunications Hong Kong 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 accounts for debt. In this calculation we’ve used 5.4%, 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 from the industry average beta of comparable companies, with an imposed limit between 0.8 and 2.0 globally, is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it ideally won’t be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Perhaps you’d apply different cases and assumptions and see how they would impact the company’s valuation. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Hutchison Telecommunications Hong Kong Holdings, there are three relevant elements you should further examine:

  1. risks: For example, we’ve discovered 1 warning sign for Hutchison Telecommunications Hong Kong Holdings that you should be aware of before investing here.
  2. Future Earnings: How does 215’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks just search here.

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.

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