City Developments Limited (SGX:C09) is currently trading at a 43% discount to its estimated intrinsic value, presenting an opportunity for investors, according to analyses by Morgan Stanley and JPMorgan. Using the Discounted Cash Flow (DCF) model, the firms estimate a fair value of S$11.12, highlighting the potential for a 76% upside from the current share price of S$6.30. The article provides insights into the calculation methodology, key assumptions, and a SWOT analysis for City Developments.
Key Points:
- Intrinsic Value Assessment:
- Using the 2-Stage Free Cash Flow to Equity model, City Developments’ fair value estimate is determined to be S$11.12.
- The current share price of S$6.30 implies that City Developments is undervalued by approximately 43%, creating an attractive investment opportunity.
- Discounted Cash Flow (DCF) Model:
- The article outlines the 2-stage growth model used in the DCF calculation, considering two stages of the company’s growth.
- Analysts estimate cash flows over the next ten years, incorporating a stable growth rate in the second stage.
- The present value estimate is reached by discounting the sum of future cash flows, including Terminal Value, at a cost of equity of 12%.
- Valuation and Risks:
- The total equity value, calculated as the sum of present values of future cash flows, is S$10 billion.
- Compared to the current share price of S$6.30, the company appears undervalued by 43%.
- The article acknowledges the imprecision of valuations and encourages investors to consider potential risks and uncertainties.
- SWOT Analysis:
- Strengths include dividends being covered by earnings and cash flows.
- Weaknesses include a decline in earnings over the past year and interest payments on debt not well covered.
- Opportunities include forecasted annual earnings growth faster than the Singaporean market and trading below the estimated fair value by more than 20%.
- Threats include debt not well covered by operating cash flow and expected annual revenue decline over the next three years.
- Looking Ahead:
- The article emphasizes that valuation is one aspect of the investment thesis, encouraging investors to assess various factors.
- The DCF model is regarded as a tool to test assumptions and theories, considering potential changes in growth rates, cost of equity, or risk-free rates.
- Additional Considerations:
- Risks: Investors are alerted to four warning signs for City Developments, emphasizing the importance of risk assessment.
- Future Earnings: Analyst growth expectations and comparisons with peers are suggested for a more comprehensive analysis.
- Other Solid Businesses: Exploring stocks with strong fundamentals is recommended for a diversified investment approach.
As investors evaluate City Developments Limited, the article provides a comprehensive perspective, combining intrinsic value analysis, risk considerations, and insights into the broader market context.
