Home Discount rate Edvantage Group Holdings Limited (HKG: 382) shares may be 37% lower than...

Edvantage Group Holdings Limited (HKG: 382) shares may be 37% lower than their intrinsic value estimate


In this article, we’ll estimate the intrinsic value of Edvantage Group Holdings Limited (HKG: 382) by projecting its future cash flows and then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don’t be put off by the lingo, the math is actually pretty straightforward.

We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you would like to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.

Check out our latest analysis for Edvantage Group Holdings

Is Edvantage Group Holdings Fairly Valued?

We use the 2-step growth model, which simply means that we take into account two stages of business growth. In the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of those future cash flows is then discounted to today’s value. :

10-year free cash flow (FCF) forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF (CN ¥, Million) CN ¥ 558.8m CN ¥ 654.8m CN ¥ 305.0m CN ¥ 520.0m CN ¥ 489.0m CN ¥ 470.8m CN ¥ 460.6m CN ¥ 455.6m CN ¥ 454.2m CN ¥ 455.3m
Source of estimated growth rate Analyst x4 Analyst x4 Analyst x1 Analyst x1 Is @ -5.96% Is @ -3.73% East @ -2.17% Is @ -1.07% East @ -0.31% Est @ 0.23%
Present value (CN ¥, million) discounted at 6.6% CN ¥ 524 CN ¥ 576 CN ¥ 252 CN ¥ 403 CN ¥ 356 CN ¥ 321 CN ¥ 295 CN274 CN ¥ 256 CN ¥ 241

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = CN ¥ 3.5b

It is now a matter of calculating the Terminal Value, which takes into account all 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 used the 5-year average of the 10-year government bond yield (1.5%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 6.6%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = CN ¥ 455m × (1 + 1.5%) ÷ (6.6% – 1.5%) = CN ¥ 9.1b

Present value of terminal value (PVTV)= TV / (1 + r)ten= CN ¥ 9.1b ÷ (1 + 6.6%)ten= CN ¥ 4.8b

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is CN ¥ 8.3b. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current stock price of 5.8 Hong Kong dollars, the company looks fairly good value with a 37% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.

SEHK: 382 Discounted Cash Flow July 27, 2021

The hypotheses

Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play 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 Edvantage Group 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 takes into account debt. . In this calculation, we used 6.6%, which is based on a leveraged beta of 0.943. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.

Next steps:

While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rock-solid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. Why is intrinsic value greater than the current share price? For Edvantage Group Holdings, we’ve compiled three other things you should consider:

  1. Risks: We think you should evaluate the 3 warning signs for Edvantage Group Holdings we reported before making an investment in the business.
  2. Future benefits: How does 382’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
  3. Other strong companies: 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 trading fundamentals to see if there are other companies you might not have considered!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for each SEHK share. If you want to find the calculation for other actions, just search here.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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