DFI Retail Group Holdings' estimated fair value is US$1.78 based on Dividend Discount Model
Current share price of US$2.25 suggests DFI Retail Group Holdings is potentially 27% overvalued
Our fair value estimate is 45% lower than DFI Retail Group Holdings' analyst price target of US$3.22
In this article we are going to estimate the intrinsic value of DFI Retail Group Holdings Limited (SGX:D01) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for DFI Retail Group Holdings
Is DFI Retail Group Holdings Fairly Valued?
As DFI Retail Group Holdings operates in the consumer retailing sector, we need to calculate the intrinsic value slightly differently. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. 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 (2.0%). The expected dividend per share is then discounted to today's value at a cost of equity of 6.7%. Compared to the current share price of US$2.3, the company appears slightly overvalued 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.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= US$0.1 / (6.7% – 2.0%)
= US$1.8
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 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 6.7%, which is based on a levered beta of 0.800. 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 DFI Retail Group Holdings
Strength
Debt is well covered by cash flow.
Balance sheet summary for D01.
Weakness
Interest payments on debt are not well covered.
Dividend is low compared to the top 25% of dividend payers in the Consumer Retailing market.
Opportunity
Expected to breakeven next year.
Has sufficient cash runway for more than 3 years based on current free cash flows.
Good value based on P/S ratio compared to estimated Fair P/S ratio.
Threat
Paying a dividend but company is unprofitable.
See D01's dividend history.
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For DFI Retail Group Holdings, there are three further factors you should consider:
Risks: You should be aware of the 1 warning sign for DFI Retail Group Holdings we've uncovered before considering an investment in the company.
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.
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!
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.
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.
由於DFI Retail Group Holdings在消費零售領域開展業務,因此我們需要以略微不同的方式計算內在價值。與其使用自由現金流(很難估計,而且該行業的分析師通常不會報告),而是使用每股分紅(DPS)支付。除非公司將其大部分FCF作爲股息支付,否則這種方法通常會低估股票的價值。我們使用戈登增長模型,該模型假設股息將以可以持續的速度永久增長。出於多種原因,使用了非常保守的增長率,該增長率不能超過公司的國內生產總值(GDP)。在本例中,我們使用了10年期國債收益率的5年平均值(2.0%)。然後,將預期的每股股息折現爲今天的價值,權益成本爲6.7%。與目前的2.3美元股價相比,在撰寫本文時,該公司的估值似乎略有過高。任何計算中的假設都會對估值產生重大影響,因此最好將其視爲粗略估計,而不是精確到最後一美分。
每股價值 = 每股預期股息/(折現率-永久增長率)
= 0.1 美元/ (6.7% — 2.0%)
= 1.8 美元
假設
上面的計算在很大程度上取決於兩個假設。第一個是貼現率,另一個是現金流。如果你不同意這些結果,那就自己嘗試一下計算並嘗試假設。DCF也沒有考慮行業可能的週期性,也沒有考慮公司未來的資本需求,因此它沒有全面反映公司的潛在業績。鑑於我們將DFI Retail Group Holdings視爲潛在股東,因此權益成本被用作貼現率,而不是考慮債務的資本成本(或加權平均資本成本,WACC)。在此計算中,我們使用了 6.7%,這是基於 0.800 的槓桿測試值。Beta是衡量股票與整個市場相比波動性的指標。我們的beta值來自全球可比公司的行業平均貝塔值,施加的限制在0.8和2.0之間,這是穩定業務的合理區間。