Estimated intrinsic value of Tysan ​​Holdings Limited (HKG: 687)

How far is Tysan ​​Holdings Limited (HKG:687) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by projecting its future cash flows and then discounting them to the present value. This will be done using the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.

Remember though that there are many ways to estimate the value of a business and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.

Check out our latest analysis for Tysan ​​Holdings

Calculate numbers

As Tysan ​​Holdings operates in the construction industry, we need to calculate intrinsic value slightly differently. In this approach, dividends per share (DPS) are used, because free cash flow is difficult to estimate and often not reported by analysts. Unless a company pays the majority of its FCF as a dividend, this method will generally underestimate the value of the stock. The “Gordon Growth Model” is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a company’s Gross Domestic Product (GDP). In this case, we used the 5-year average of the 10-year government bond yield (1.6%). The expected dividend per share is then discounted to its present value at a cost of equity of 8.6%. Compared to the current share price of HK$0.3, the company appears to be about fair value at a 9.5% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= HK$0.03 / (8.6% – 1.6%)

= HK$0.4

SEHK: 687 Discounted Cash Flow November 8, 2022

The hypotheses

The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Tysan ​​Holdings 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 factors in debt. In this calculation, we used 8.6%, which is based on a leveraged beta of 1.193. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Tysan ​​Holdings

Strength
  • Debt is not considered a risk.
Weakness
  • The dividend is low compared to the top 25% dividend payers in the construction market.
Opportunity
  • The current stock price is below our estimate of fair value.
  • The lack of analyst coverage makes it difficult to determine 687’s earnings outlook.
Threatens
  • Dividends are not covered by profits.

Next steps:

Although the valuation of a business is important, it will ideally not be the only piece of analysis you will look at for a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. For Tysan ​​Holdings, we’ve rounded up three more things you should consider:

  1. Risks: Be aware that Tysan ​​Holdings displays 1 warning sign in our investment analysis you should know…
  2. Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
  3. Other top analyst picks: Interested to see what the analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think could have attractive future prospects!

PS. Simply Wall St updates its DCF calculation for every Hong Kong stock daily, so if you want to find the intrinsic value of any other stock, just search here.

Valuation is complex, but we help make it simple.

Find out if Tysan ​​Holdings is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Myra R.

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