A look at the fair value of Tai Sin Electric Limited (SGX:500)

Key findings

• The estimated fair value of Tai Sin Electric is S$0.40 based on the dividend discount model.

• With a share price of S$0.39, Tai Sin Electric appears to be trading close to its estimated fair value

How far is Tai Sin Electric Limited (SGX:500) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by projecting its future cash flows and then discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. This may sound complicated, but it’s actually quite simple!

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one method. 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 Tai Sin Electric

What is the estimated value?

Because Tai Sin Electric operates in the electrical sector, we need to calculate intrinsic value a little differently. 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 free cash flow as dividends, this method will typically underestimate the value of the stock. It uses the ‘Gordon Growth Model’, which simply assumes that dividend payments will continue to grow at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year government bond yield of 2.1%. We then discount this number to today’s value at a cost of equity of 8.0%. Relative to the current share price of S$0.4, the company appears to be about fairly valued at a 3.6% discount to the current share price. However, keep in mind that this is only an approximate assessment and, as with any complex formula, where garbage goes in, garbage also comes out.

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

The story goes on

= S$0.02 / (8.0% – 2.1%)

= 0.4S$

Important assumptions

The above calculation relies heavily 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. 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 consider Tai Sin Electric 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 8.0% which is based on a leveraged beta of 1.279. 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 Tai Sin Electric

Strength

weakness

Opportunity

Danger

Next Steps:

Valuation is only one side of the coin in building your investment thesis and just one of many factors you need to evaluate for a company. The DCF model is not a perfect tool for stock valuation. It should be viewed more as a guide to “what assumptions need to hold 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 significantly, the outcome could be very different. For Tai Sin Electric, there are three key points to consider:

1. Risks: A typical example: We discovered 2 warning signs for Tai Sin Electric You should be aware.

2. management:Have insiders been adding to their shares to capitalize on market sentiment about 500’s future prospects? Read our management and board analysis for insights into CEO compensation and governance factors.

3. 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!

PS. The Simply Wall St app runs a discounted cash flow valuation for every stock on the SGX 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 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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