Estimated fair value of China Nonferrous Mining Corporation Limited (HKG:1258)
Today we’ll walk through one way to estimate the intrinsic value of China Nonferrous Mining Corporation Limited (HKG:1258) by projecting its future cash flows and then discounting them to present value. One way to do this is to use the discounted cash flow (DCF) model. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.
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 China Nonferrous Mining
Is China Nonferrous Mining Fairly Valued?
We have to calculate the value of China Nonferrous Mining slightly differently than other stocks because it is a metals and mining company. Instead of using free cash flow, which is difficult to estimate and often not reported by industry analysts, dividend payments per share (DPS) are used. 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 rate of growth forever. For a number of reasons, a very conservative growth rate is used that 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 (1.5%). The expected dividend per share is then discounted to its present value at a cost of equity of 7.7%. Compared to the current share price of HK$4.1, the company appears to be about fair value at a 16% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)
= $0.04 / (7.7% – 1.5%)
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider China Nonferrous Mining 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 debt into account. In this calculation, we used 7.7%, which is based on a leveraged beta of 1.253. 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.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the only piece of analysis you look at for a company. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must 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 have a significant impact on the valuation. For China Nonferrous Mining, we have compiled three additional factors you should consider:
- Risks: We believe that you should evaluate the 3 warning signs for China Nonferrous Mining we reported before investing in the company.
- Future earnings: How does 1258’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- 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!
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.
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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.