Aerospace CH UAVLtd's estimated fair value is CN¥16.50 based on 2 Stage Free Cash Flow to Equity
With CN¥13.65 share price, Aerospace CH UAVLtd appears to be trading close to its estimated fair value
The CN¥21.60 analyst price target for 002389 is 31% more than our estimate of fair value
How far off is Aerospace CH UAV Co.,Ltd (SZSE:002389) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. Our analysis will employ 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.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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.
What's The Estimated Valuation?
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥189.6m
CN¥328.2m
CN¥499.0m
CN¥685.1m
CN¥870.0m
CN¥1.04b
CN¥1.20b
CN¥1.33b
CN¥1.44b
CN¥1.54b
Growth Rate Estimate Source
Est @ 103.19%
Est @ 73.10%
Est @ 52.04%
Est @ 37.30%
Est @ 26.98%
Est @ 19.76%
Est @ 14.70%
Est @ 11.16%
Est @ 8.68%
Est @ 6.95%
Present Value (CN¥, Millions) Discounted @ 8.9%
CN¥174
CN¥277
CN¥386
CN¥486
CN¥567
CN¥623
CN¥656
CN¥670
CN¥668
CN¥656
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥5.2b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥26b÷ ( 1 + 8.9%)10= CN¥11b
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¥16b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥13.7, the company appears about fair value at a 17% 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.
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 Aerospace CH UAVLtd 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 8.9%, which is based on a levered beta of 1.073. 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 Aerospace CH UAVLtd
Strength
Debt is not viewed as a risk.
Balance sheet summary for 002389.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Electronic market.
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Current share price is below our estimate of fair value.
Threat
Dividends are not covered by cash flow.
See 002389's dividend history.
Moving On:
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. 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 Aerospace CH UAVLtd, we've compiled three additional elements you should further research:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Aerospace CH UAVLtd , and understanding them should be part of your investment process.
Future Earnings: How does 002389'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 SZSE 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
("Est" = Simply Wall St 估計的自由現金流增長率) 10 年現金流的現值(PVCF)= CN¥5.2b
現在我們需要計算終端價值,該價值考慮了此十年期之後的所有未來現金流。由於許多原因,我們使用非常保守的增長率,該增長率不能超過一個國家的GDP增長。在這種情況下,我們使用了10年期政府債券收益率的5年平均值(2.9%)來預估未來增長。與10年“增長”期相同,我們使用股權成本率(Cost of Equity,COE)將未來現金流折現爲今天的價值。在這個計算中,我們使用了8.9%,這基於1.073的槓桿貝塔值。貝塔是對股票相對於整個市場的波動性的衡量。我們從全球可比公司的行業平均貝塔值中獲得貝塔值,將其限制在0.8到2.0之間,這是一個穩定公司的合理範圍。