A Look At The Fair Value Of G.H.Y Culture & Media Holding Co., Limited (SGX:XJB)

Key Insights

• The projected fair value for G.H.Y Culture & Media Holding is S$0.32 based on 2 Stage Free Cash Flow to Equity

• Current share price of S$0.37 suggests G.H.Y Culture & Media Holding is potentially trading close to its fair value

Today we will run through one way of estimating the intrinsic value of G.H.Y Culture & Media Holding Co., Limited (SGX:XJB) 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. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for G.H.Y Culture & Media Holding

The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.

A 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (SGD, Millions)	S$9.56m	S$11.8m	S$13.8m	S$15.6m	S$17.0m	S$18.3m	S$19.3m	S$20.2m	S$20.9m	S$21.6m
Growth Rate Estimate Source	Est @ 32.72%	Est @ 23.52%	Est @ 17.08%	Est @ 12.57%	Est @ 9.41%	Est @ 7.20%	Est @ 5.66%	Est @ 4.58%	Est @ 3.82%	Est @ 3.29%
Present Value (SGD, Millions) Discounted @ 7.0%	S$8.9	S$10.3	S$11.3	S$11.9	S$12.1	S$12.1	S$12.0	S$11.7	S$11.4	S$11.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$113m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (2.1%) 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 7.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = S$22m× (1 + 2.1%) ÷ (7.0%– 2.1%) = S$443m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= S$443m÷ ( 1 + 7.0%)¹⁰= S$225m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$338m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of S$0.4, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

The Assumptions

We would point out 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 result, have a go at the calculation yourself and play with the assumptions. 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 G.H.Y Culture & Media 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 accounts for debt. In this calculation we've used 7.0%, which is based on a levered beta of 1.082. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for G.H.Y Culture & Media Holding

Strength

• Debt is not viewed as a risk.

Weakness

• Dividend is low compared to the top 25% of dividend payers in the Entertainment market.

• Current share price is above our estimate of fair value.

Opportunity

• Has sufficient cash runway for more than 3 years based on current free cash flows.

• Lack of analyst coverage makes it difficult to determine XJB's earnings prospects.

Threat

• No apparent threats visible for XJB.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For G.H.Y Culture & Media Holding, we've compiled three pertinent items you should further research:

1. Risks: Take risks, for example - G.H.Y Culture & Media Holding has 1 warning sign we think you should be aware of.

2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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

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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.