A Look At The Intrinsic Value Of Zheneng Jinjiang Environment Holding Company Limited (SGX:BWM)

Key Insights

• The projected fair value for Zheneng Jinjiang Environment Holding is S$0.58 based on 2 Stage Free Cash Flow to Equity

• Current share price of S$0.48 suggests Zheneng Jinjiang Environment Holding is potentially trading close to its fair value

• Zheneng Jinjiang Environment Holding's peers are currently trading at a premium of 136% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Zheneng Jinjiang Environment Holding Company Limited (SGX:BWM) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

Check out our latest analysis for Zheneng Jinjiang Environment Holding

The Model

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. 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥333.9m	CN¥326.7m	CN¥323.8m	CN¥323.7m	CN¥325.7m	CN¥329.1m	CN¥333.5m	CN¥338.7m	CN¥344.5m	CN¥350.7m
Growth Rate Estimate Source	Est @ -3.95%	Est @ -2.15%	Est @ -0.89%	Est @ -0.01%	Est @ 0.61%	Est @ 1.04%	Est @ 1.34%	Est @ 1.56%	Est @ 1.70%	Est @ 1.81%
Present Value (CN¥, Millions) Discounted @ 8.7%	CN¥307	CN¥276	CN¥252	CN¥232	CN¥214	CN¥199	CN¥186	CN¥173	CN¥162	CN¥152

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥2.2b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 8.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥351m× (1 + 2.1%) ÷ (8.7%– 2.1%) = CN¥5.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥5.4b÷ ( 1 + 8.7%)¹⁰= CN¥2.3b

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 CN¥4.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of S$0.5, the company appears about fair value at a 16% 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.

dcf

Important Assumptions

Now 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 Zheneng Jinjiang Environment 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 8.7%, which is based on a levered beta of 1.187. 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 Zheneng Jinjiang Environment Holding

Strength

• No major strengths identified for BWM.

Weakness

• Earnings declined over the past year.

• Interest payments on debt are not well covered.

Opportunity

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

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

Threat

• Debt is not well covered by operating cash flow.

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Zheneng Jinjiang Environment Holding, we've compiled three pertinent aspects you should look at:

1. Risks: For example, we've discovered 2 warning signs for Zheneng Jinjiang Environment Holding that you should be aware of before investing here.

2. 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!

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.