A Look At The Fair Value Of Leishen Energy Holding Co., Ltd. (NASDAQ:LSE)

Key Insights

• Leishen Energy Holding's estimated fair value is US$4.50 based on 2 Stage Free Cash Flow to Equity
• Current share price of US$4.20 suggests Leishen Energy Holding is potentially trading close to its fair value
• Leishen Energy Holding's peers seem to be trading at a higher discount to fair value based onthe industry average of 49%

Today we will run through one way of estimating the intrinsic value of Leishen Energy Holding Co., Ltd. (NASDAQ:LSE) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF ($, Millions)	US$5.57m	US$4.75m	US$4.31m	US$4.07m	US$3.95m	US$3.91m	US$3.92m	US$3.96m	US$4.03m	US$4.12m
Growth Rate Estimate Source	Est @ -22.38%	Est @ -14.69%	Est @ -9.30%	Est @ -5.54%	Est @ -2.90%	Est @ -1.05%	Est @ 0.24%	Est @ 1.15%	Est @ 1.78%	Est @ 2.23%
Present Value ($, Millions) Discounted @ 7.6%	US$5.2	US$4.1	US$3.5	US$3.0	US$2.7	US$2.5	US$2.3	US$2.2	US$2.1	US$2.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$30m

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 (3.3%) 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 7.6%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = US$4.1m× (1 + 3.3%) ÷ (7.6%– 3.3%) = US$98m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$98m÷ ( 1 + 7.6%)¹⁰= US$47m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$77m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$4.2, the company appears about fair value at a 6.7% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Leishen Energy 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 7.6%, which is based on a levered beta of 0.828. 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.

See our latest analysis for Leishen Energy Holding

SWOT Analysis for Leishen Energy Holding

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Leishen Energy Holding, we've compiled three fundamental items you should explore:

1. Risks: You should be aware of the 3 warning signs for Leishen Energy Holding we've uncovered before considering an investment in the company.
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 Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock 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.