Calculating The Intrinsic Value Of Jimu Group Limited (HKG:8187)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jimu Group fair value estimate is HK$0.42
• Jimu Group's HK$0.49 share price indicates it is trading at similar levels as its fair value estimate

How far off is Jimu Group Limited (HKG:8187) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. 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. 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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The Method

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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 (HK$, Millions)	HK$3.35m	HK$3.59m	HK$3.80m	HK$3.99m	HK$4.16m	HK$4.32m	HK$4.47m	HK$4.62m	HK$4.77m	HK$4.92m
Growth Rate Estimate Source	Est @ 8.99%	Est @ 7.14%	Est @ 5.84%	Est @ 4.94%	Est @ 4.30%	Est @ 3.86%	Est @ 3.55%	Est @ 3.33%	Est @ 3.18%	Est @ 3.07%
Present Value (HK$, Millions) Discounted @ 8.7%	HK$3.1	HK$3.0	HK$3.0	HK$2.9	HK$2.7	HK$2.6	HK$2.5	HK$2.4	HK$2.2	HK$2.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$27m

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. 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 (2.8%) 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 8.7%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = HK$4.9m× (1 + 2.8%) ÷ (8.7%– 2.8%) = HK$85m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$85m÷ ( 1 + 8.7%)¹⁰= HK$37m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is HK$63m. 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$0.5, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

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. 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 Jimu Group 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 1.160. 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.

Check out our latest analysis for Jimu Group

SWOT Analysis for Jimu Group

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Jimu Group, we've compiled three fundamental aspects you should look at:

1. Risks: Case in point, we've spotted 3 warning signs for Jimu Group you should be aware of, and 2 of them don't sit too well with us.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 8187's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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. Simply Wall St updates its DCF calculation for every Hong Kong 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.