Advertisement
New Zealand markets closed
  • NZX 50

    11,783.39
    -26.09 (-0.22%)
     
  • NZD/USD

    0.6123
    +0.0021 (+0.35%)
     
  • NZD/EUR

    0.5638
    +0.0000 (+0.01%)
     
  • ALL ORDS

    7,999.20
    -83.90 (-1.04%)
     
  • ASX 200

    7,727.60
    -84.20 (-1.08%)
     
  • OIL

    77.80
    +0.93 (+1.21%)
     
  • GOLD

    2,335.20
    -2.00 (-0.09%)
     
  • NASDAQ

    18,808.35
    +184.96 (+0.99%)
     
  • FTSE

    8,317.59
    -21.64 (-0.26%)
     
  • Dow Jones

    39,069.59
    +4.33 (+0.01%)
     
  • DAX

    18,693.37
    +2.05 (+0.01%)
     
  • Hang Seng

    18,608.94
    -259.77 (-1.38%)
     
  • NIKKEI 225

    38,646.11
    -457.11 (-1.17%)
     
  • NZD/JPY

    96.0860
    +0.3840 (+0.40%)
     

A Look At The Intrinsic Value Of Venture Corporation Limited (SGX:V03)

Key Insights

  • The projected fair value for Venture is S$12.28 based on 2 Stage Free Cash Flow to Equity

  • Venture's S$13.48 share price indicates it is trading at similar levels as its fair value estimate

  • Our fair value estimate is 17% lower than Venture's analyst price target of S$14.85

How far off is Venture Corporation Limited (SGX:V03) 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. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

ADVERTISEMENT

See our latest analysis for Venture

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (SGD, Millions)

S$253.6m

S$233.7m

S$222.8m

S$216.8m

S$214.1m

S$213.5m

S$214.4m

S$216.3m

S$219.0m

S$222.2m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Est @ -4.67%

Est @ -2.66%

Est @ -1.26%

Est @ -0.27%

Est @ 0.41%

Est @ 0.90%

Est @ 1.23%

Est @ 1.47%

Present Value (SGD, Millions) Discounted @ 7.5%

S$236

S$202

S$179

S$163

S$149

S$139

S$129

S$122

S$114

S$108

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$1.5b

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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 7.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = S$222m× (1 + 2.0%) ÷ (7.5%– 2.0%) = S$4.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$4.2b÷ ( 1 + 7.5%)10= S$2.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$3.6b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of S$13.5, 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.

dcf
dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Venture 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 7.5%, which is based on a levered beta of 1.091. 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 Venture

Strength

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Earnings declined over the past year.

  • Dividend is low compared to the top 25% of dividend payers in the Electronic market.

  • Expensive based on P/E ratio and estimated fair value.

Opportunity

  • Annual earnings are forecast to grow for the next 3 years.

Threat

  • Annual earnings are forecast to grow slower than the Singaporean market.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for 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?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Venture, we've compiled three further items you should assess:

  1. Risks: As an example, we've found 1 warning sign for Venture that you need to consider before investing here.

  2. Future Earnings: How does V03'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.

  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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.