The projected fair value for Bluestar Adisseo is CN¥14.44 based on 2 Stage Free Cash Flow to Equity
Bluestar Adisseo is estimated to be 30% undervalued based on current share price of CN¥10.15
Our fair value estimate is 40% higher than Bluestar Adisseo's analyst price target of CN¥10.30
In this article we are going to estimate the intrinsic value of Bluestar Adisseo Company (SHSE:600299) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!
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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Is Bluestar Adisseo Fairly Valued?
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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥1.50b
CN¥1.74b
CN¥1.95b
CN¥2.13b
CN¥2.29b
CN¥2.42b
CN¥2.55b
CN¥2.66b
CN¥2.76b
CN¥2.87b
Growth Rate Estimate Source
Est @ 21.47%
Est @ 15.90%
Est @ 12.00%
Est @ 9.27%
Est @ 7.36%
Est @ 6.02%
Est @ 5.08%
Est @ 4.43%
Est @ 3.97%
Est @ 3.65%
Present Value (CN¥, Millions) Discounted @ 8.3%
CN¥1.4k
CN¥1.5k
CN¥1.5k
CN¥1.5k
CN¥1.5k
CN¥1.5k
CN¥1.5k
CN¥1.4k
CN¥1.3k
CN¥1.3k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥14b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.3%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥54b÷ ( 1 + 8.3%)10= CN¥24b
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¥39b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥10.2, the company appears a touch undervalued at a 30% 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.
SHSE:600299 Discounted Cash Flow July 12th 2024
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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Bluestar Adisseo 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 8.3%, which is based on a levered beta of 0.968. 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 Bluestar Adisseo
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for 600299.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Chemicals market.
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Trading below our estimate of fair value by more than 20%.
Threat
Annual revenue is forecast to grow slower than the Chinese market.
What else are analysts forecasting for 600299?
Looking Ahead:
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. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. What is the reason for the share price sitting below the intrinsic value? For Bluestar Adisseo, we've compiled three important items you should consider:
Risks: To that end, you should be aware of the 2 warning signs we've spotted with Bluestar Adisseo .
Future Earnings: How does 600299'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 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SHSE every day. If you want to find the calculation for other stocks 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com