Yahoo Finance StarHub Ltd (SGX:CC3) Is Trading At A 38% Discount
I am going to run you through how I calculated the intrinsic value of StarHub Ltd (SGX:CC3) using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in May 2018 so be sure check the latest calculation for StarHub here.
Is CC3 fairly valued?
We are going to use a two-stage DCF 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 perpetual stable growth rate. To begin, I took the analyst consensus estimates of CC3’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 6.62%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of S$1.04B. Keen to understand how I calculated this value? Read our detailed analysis here.
The graph above shows how CC3’s earnings are expected to move going forward, which should give you an idea of CC3’s outlook. Secondly, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes S$4.86B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is S$5.90B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of SGD3.41, which, compared to the current share price of SGD2.12, we see that StarHub is quite undervalued at a 37.84% discount to what it is available for right now.
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. What is the reason for the share price to differ from the intrinsic value? For CC3, there are three pertinent factors you should look at:
Financial Health: Does CC3 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does CC3’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CC3? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the SGX every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
