Estimating The Intrinsic Value Of COSCO SHIPPING International (Singapore) Co., Ltd. (SGX:F83)

Key Insights

• The projected fair value for COSCO SHIPPING International (Singapore) is S$0.18 based on 2 Stage Free Cash Flow to Equity

• Current share price of S$0.15 suggests COSCO SHIPPING International (Singapore) is potentially trading close to its fair value

• COSCO SHIPPING International (Singapore)'s peers seem to be trading at a higher discount to fair value based onthe industry average of 32%

How far off is COSCO SHIPPING International (Singapore) Co., Ltd. (SGX:F83) 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 today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 COSCO SHIPPING International (Singapore)

The Method

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 begin with, we have to get estimates of 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (SGD, Millions)	S$28.4m	S$27.0m	S$26.3m	S$26.0m	S$25.9m	S$26.0m	S$26.3m	S$26.6m	S$27.0m	S$27.5m
Growth Rate Estimate Source	Est @ -7.71%	Est @ -4.77%	Est @ -2.71%	Est @ -1.26%	Est @ -0.26%	Est @ 0.45%	Est @ 0.95%	Est @ 1.29%	Est @ 1.53%	Est @ 1.70%
Present Value (SGD, Millions) Discounted @ 7.9%	S$26.3	S$23.2	S$20.9	S$19.1	S$17.7	S$16.5	S$15.4	S$14.4	S$13.6	S$12.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$180m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = S$27m× (1 + 2.1%) ÷ (7.9%– 2.1%) = S$481m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= S$481m÷ ( 1 + 7.9%)¹⁰= S$224m

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$404m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of S$0.2, the company appears about fair value at a 16% discount to where the stock price trades currently. 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

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 COSCO SHIPPING International (Singapore) 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 7.9%, which is based on a levered beta of 1.268. 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 COSCO SHIPPING International (Singapore)

Strength

• Debt is well covered by cash flow.

Weakness

• Interest payments on debt are not well covered.

Opportunity

• Current share price is below our estimate of fair value.

• Lack of analyst coverage makes it difficult to determine F83's earnings prospects.

Threat

• No apparent threats visible for F83.

Next Steps:

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. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For COSCO SHIPPING International (Singapore), we've compiled three essential factors you should further research:

1. Risks: Every company has them, and we've spotted 1 warning sign for COSCO SHIPPING International (Singapore) you should know about.

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. Simply Wall St updates its DCF calculation for every Singaporean stock every day, so if you want to find the intrinsic value of any other stock 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.

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