Key Insights

Using the 2 Stage Free Cash Flow to Equity, Hongkong Land Holdings fair value estimate is US$4.40 Current share price of US$4.51 suggests Hongkong Land Holdings is potentially trading close to its fair value Analyst price target for H78 is US$4.87, which is 11% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Hongkong Land Holdings Limited (SGX:H78) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Hongkong Land Holdings

What's The Estimated Valuation?

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 begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions)  US$534.9m US$680.0m US$684.7m US$692.6m US$703.0m US$715.1m US$728.6m US$743.2m US$758.7m US$774.9m Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ 0.68% Est @ 1.16% Est @ 1.49% Est @ 1.73% Est @ 1.89% Est @ 2.00% Est @ 2.08% Est @ 2.14% Present Value ($, Millions) Discounted @ 8.8%  US$492 US$575 US$532 US$495 US$462 US$432 US$404 US$379 US$356 US$334

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$4.5b

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 (2.3%) 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 8.8%.

Story Continues

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$775m× (1 + 2.3%) ÷ (8.8%– 2.3%) = US$12b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$12b÷ ( 1 + 8.8%)10= US$5.3b

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$9.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$4.5, 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.SGX:H78 Discounted Cash Flow February 25th 2025

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Hongkong Land 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 accounts for debt. In this calculation we've used 8.8%, which is based on a levered beta of 1.501. 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 Hongkong Land Holdings

Strength

Debt is well covered by earnings.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Real Estate market.

Expensive based on P/S ratio and estimated fair value.

Opportunity

Expected to breakeven next year.

Has sufficient cash runway for more than 3 years based on current free cash flows.

Threat

Debt is not well covered by operating cash flow.

Paying a dividend but company is unprofitable.

Revenue is forecast to decrease over the next 2 years.

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. DCF models are not the be-all and end-all of investment valuation. 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 Hongkong Land Holdings, there are three essential elements you should further examine:

Risks: Take risks, for example - Hongkong Land Holdings has  1 warning sign  we think you should be aware of. Future Earnings: How does H78'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 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. 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.

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