Key Insights
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Using the 2 Stage Free Cash Flow to Equity, DFI Retail Group Holdings fair value estimate is US$6.60
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DFI Retail Group Holdings' US$3.95 share price signals that it might be 40% undervalued
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The US$4.24 analyst price target for D01 is 36% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of DFI Retail Group Holdings Limited ( SGX:D01 ) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model .
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF ($, Millions) |
US$541.5m |
US$605.5m |
US$551.9m |
US$521.7m |
US$505.7m |
US$498.5m |
US$497.3m |
US$500.1m |
US$505.8m |
US$513.5m |
| Growth Rate Estimate Source |
Analyst x2 |
Analyst x2 |
Est @ -8.86% |
Est @ -5.46% |
Est @ -3.08% |
Est @ -1.42% |
Est @ -0.25% |
Est @ 0.57% |
Est @ 1.14% |
Est @ 1.54% |
| Present Value ($, Millions) Discounted @ 7.4% |
US$504 |
US$525 |
US$446 |
US$393 |
US$354 |
US$325 |
US$302 |
US$283 |
US$267 |
US$252 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= US$3.7b
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$514m× (1 + 2.5%) ÷ (7.4%– 2.5%) = US$11b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$11b÷ ( 1 + 7.4%)10= US$5.3b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$8.9b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$4.0, the company appears quite undervalued at a 40% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 DFI Retail Group Holdings 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 7.4%, which is based on a levered beta of 0.960. 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.
See our latest analysis for DFI Retail Group Holdings
SWOT Analysis for DFI Retail Group Holdings
Strength
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Debt is well covered by cash flow.
Weakness
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Interest payments on debt are not well covered.
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Dividend is low compared to the top 25% of dividend payers in the Consumer Retailing market.
Opportunity
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Expected to breakeven next year.
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Has sufficient cash runway for more than 3 years based on current free cash flows.
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Good value based on P/S ratio and estimated fair value.
Threat
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Paying a dividend but company is unprofitable.
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Revenue is forecast to decrease over the next 2 years.
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For DFI Retail Group Holdings, there are three further elements you should explore:
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Risks: For example, we've discovered 1 warning sign for DFI Retail Group Holdings that you should be aware of before investing here.
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Future Earnings: How does D01'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 .
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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. 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.
