A look at the intrinsic value of Continental Aerospace Technologies Holding Limited (HKG:232)

Key findings

• The estimated fair value of Continental Aerospace Technologies Holding is HK$0.11 based on the dividend discount model.
• With a share price of HK$0.13, Continental Aerospace Technologies Holding appears to be trading close to its estimated fair value
• Compared to the industry average discount of -563%, Continental Aerospace Technologies Holding’s competitors appear to be trading at a higher premium to fair value.

How far is Continental Aerospace Technologies Holding Limited (HKG:232) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by taking the expected future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

Companies can be valued in many ways, so we want to point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Continental Aerospace Technologies Holding

The calculation

We need to calculate Continental Aerospace Technologies Holding’s value a little differently than other stocks because it’s an aerospace and defense company. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often unreported by analysts. Unless a company pays out the majority of its FCF as dividends, this method will typically underestimate the stock’s value. We use the Gordon Growth Model, which assumes the dividend will grow at a sustainable rate over time. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year government bond yield of 2.2%. We then discount that number to today’s value at a cost of equity of 6.6%. Compared to the current share price of HK$0.1, the company appears to be about fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to consider this as a rough estimate that is not accurate to the last cent.

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

= HK$0.005 / (6.6% – 2.2%)

= 0.1HK$

The assumptions

The above calculation heavily depends 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 repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t give a complete picture of a company’s potential performance. Since we consider Continental Aerospace Technologies Holding 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 takes debt into account. In this calculation, we used 6.6% which is based on a levered beta of 0.814. 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 an imposed limit of between 0.8 and 2.0 which is a reasonable range for a stable company.

SWOT analysis for Continental Aerospace Technologies Holding

Go on:

While the valuation of a company is important, it is only one of many factors you need to evaluate a company. It is not possible to get a foolproof valuation using a DCF model. A better way would be to apply different cases and assumptions and see how they would affect the valuation of the company. For example, if the growth rate of the terminal value is adjusted slightly, it can change the overall result dramatically. For Continental Aerospace Technologies Holding, we have put together three more points for you to consider:

1. Risks: For example, we found 2 warning signals for Continental Aerospace Technologies Holding that you should know.
2. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!
3. Other environmentally friendly companies: Are you concerned about the environment and believe that consumers will increasingly buy environmentally friendly products? Browse through our interactive list of companies thinking about a greener future and discover some stocks you may not have thought of yet!

PS. The Simply Wall St app runs a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks, 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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