Yahoo Finance Estimating The Fair Value Of 58com Inc (NYSE:WUBA)
In this article I am going to calculate the intrinsic value of 58com Inc (NYSE:WUBA) by projecting its future cash flows and then discounting them to today’s value. I will use the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.
Check out our latest analysis for 58.com
The model
I’m 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 perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (CN¥, Millions) | CN¥4.18k | CN¥5.14k | CN¥6.06k | CN¥7.10k | CN¥8.23k |
Source | Analyst x4 | Analyst x4 | Est @ 18%, capped from 47.33% | Est @ 17%, capped from 47.33% | Est @ 16%, capped from 47.33% |
Present Value Discounted @ 11.5% | CN¥3.75k | CN¥4.13k | CN¥4.38k | CN¥4.59k | CN¥4.78k |
Present Value of 5-year Cash Flow (PVCF)= CN¥21.63b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 11.5%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CN¥8.23b × (1 + 2.9%) ÷ (11.5% – 2.9%) = CN¥99.17b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CN¥99.17b ÷ ( 1 + 11.5%)5 = CN¥57.55b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥79.19b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of CN¥536.9. However, WUBA’s primary listing is in China, and 1 share of WUBA in CNY represents 0.146 ( CNY/ USD) share of NYSE:WUBA, so the intrinsic value per share in USD is $78.19. Relative to the current share price of $72.63, the stock is about right, perhaps slightly undervalued at a 7.1% discount to what it is available for right now.
Important assumptions
I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at 58.com as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.5%, which is based on a levered beta of 1.212. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For WUBA, I’ve compiled three fundamental factors you should further research:
Financial Health: Does WUBA have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does WUBA’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of WUBA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
