Calculating The Fair Value Of Zhongmin Baihui Retail Group Ltd. (SGX:5SR)

Key Insights

• The projected fair value for Zhongmin Baihui Retail Group is S$0.59 based on 2 Stage Free Cash Flow to Equity

• With S$0.62 share price, Zhongmin Baihui Retail Group appears to be trading close to its estimated fair value

• Zhongmin Baihui Retail Group's peers seem to be trading at a higher premium to fair value based onthe industry average of -343%

In this article we are going to estimate the intrinsic value of Zhongmin Baihui Retail Group Ltd. (SGX:5SR) by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Zhongmin Baihui Retail Group

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 start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥63.3m	CN¥55.2m	CN¥50.6m	CN¥48.0m	CN¥46.5m	CN¥45.8m	CN¥45.6m	CN¥45.7m	CN¥46.1m	CN¥46.6m
Growth Rate Estimate Source	Est @ -19.05%	Est @ -12.73%	Est @ -8.30%	Est @ -5.21%	Est @ -3.04%	Est @ -1.52%	Est @ -0.46%	Est @ 0.28%	Est @ 0.81%	Est @ 1.17%
Present Value (CN¥, Millions) Discounted @ 9.1%	CN¥58.0	CN¥46.4	CN¥39.0	CN¥33.9	CN¥30.1	CN¥27.2	CN¥24.8	CN¥22.8	CN¥21.1	CN¥19.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥323m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 9.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥47m× (1 + 2.0%) ÷ (9.1%– 2.0%) = CN¥674m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥674m÷ ( 1 + 9.1%)¹⁰= CN¥283m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥606m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of S$0.6, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf

Important Assumptions

We would 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 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 Zhongmin Baihui Retail Group 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 9.1%, which is based on a levered beta of 1.412. 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.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Zhongmin Baihui Retail Group, we've put together three pertinent factors you should assess:

1. Risks: Be aware that Zhongmin Baihui Retail Group is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.