Fair value estimate of Vtech Holdings Limited (HKG:303)

Key findings

• The forecast fair value for Vtech Holdings is HK$71.08 based on the dividend discount model
• Vtech Holdings’ share price of HK$57.00 suggests that the stock price is at a similar level to the estimated fair value.
• The industry-wide discount to fair value of 32% suggests that Vtech Holdings’ competitors are currently trading at a higher discount

Today we’re going to go through one way to estimate the intrinsic value of Vtech Holdings Limited (HKG:303) by taking the expected future cash flows and discounting them to today’s value. We’re going to use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. If you want to learn more about intrinsic value, you should check out Simply Wall St’s analysis model.

Check out our latest analysis for Vtech Holdings

The calculation

We need to calculate the value of Vtech Holdings a little differently than other stocks because it’s a communications company. Rather than using free cash flows, which are difficult to estimate and often unreported by analysts in this industry, we use dividend payments per share (DPS). Unless a company pays out the majority of its free cash flow as dividends, this method will typically underestimate the stock’s value. It uses the “Gordon Growth Model,” which simply assumes that dividend payments will continue to grow forever at a sustainable growth rate. For a number of reasons, it uses a very conservative growth rate 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 Treasury bond yield (2.2%). The expected dividend per share is then discounted to today’s value using a cost of equity of 7.4%. Relative to the current share price of HK$57.0, the company appears to be roughly fairly valued at a 20% discount to the current share price. However, keep in mind that this is only an approximate valuation and that, as with any complex formula, where there’s garbage in, there’s garbage out.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= $0.8 / (7.4% – 2.2%)

= 71.1HK$

The assumptions

The key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we’re considering Vtech Holdings as prospective 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 takes debt into account. In this calculation, we used 7.4%, which is based on a levered beta of 0.963. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Vtech Holdings

Go on:

While the DCF calculation is important, ideally it shouldn’t be the only analysis you look at for a company. DCF models aren’t the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows differently, or its cost of equity or risk-free rate changes significantly, the outcome could be very different. For Vtech Holdings, we’ve put together three basic elements for you to examine:

1. Risks: For example, we discovered 2 warning signs for Vtech Holdings (1 cannot be ignored!) that you should know before investing here.
2. Future income: How does 303’s growth rate compare to its peers and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. 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 you might be missing out on!

PS. Simply Wall St updates its DCF calculation for each Hong Kong stock daily, so if you want to find out the intrinsic value of any other stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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