CapitaLand Investment Limited (SGX:9CI)’s intrinsic value could be 29% higher than its share price.

key insights

• CapitaLand Investment’s expected fair value is S$3.82 based on two-stage free cash flows into equity.

• Current share price of S$2.96 suggests CapitaLand Investment may be undervalued by 22%

• 9CI’s analyst price target of S$3.93 exceeds our fair value estimate by 3.0%

Does CapitaLand Investment Limited (SGX:9CI)’s January share price reflect its actual value? Today we will estimate the stock’s intrinsic value by discounting its expected future cash flows to today’s value. To do. Here we use a discounted cash flow (DCF) model. It may sound complicated, but it’s actually very easy!

We generally think of a company’s value as the present value of all the cash it will generate in the future. However, DCF is just one metric among many, and it is not without its flaws. To learn a little more about intrinsic value, read the Simply Wall St analysis model.

Check out our latest analysis for CapitaLand Investment.

Method

We use a so-called two-stage model. This means that there are two different periods in the growth rate of the company’s cash flow. Generally, the first stage is a higher growth stage and the second stage is a lower growth stage. First, you need to obtain an estimate of your cash flows for the next 10 years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will see their rate of contraction slow, and companies with growing free cash flow will see their growth rate slow over this period. This is to reflect that growth tends to be slower in the early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and the sum of these future cash flows is discounted to today’s value.

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Estimated 10-year free cash flow (FCF)

(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = 10 billion Singapore dollars

The second stage is also called the terminal value, which is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the five-year average of the 10-year Treasury yield of 2.0%. The final cash flows are discounted to today’s value at a cost of capital of 10.0%.

Terminal value (TV)=FCF₂₀₃₃ × (1 + g) ÷ (r – g) = S$190 million × (1 + 2.0%) ÷ (10.0% – 2.0%) = S$2.4 billion

Present Value of Terminal Value (PVTV)= TV / (1 + r)^Ten= S$24 billion ÷ ( 1 + 10.0%)^Ten= S$9.3 billion

The total value is the sum of the cash flows over the next 10 years plus the discounted terminal value, resulting in a total capital value, which in this case is S$19 billion. The final step is to divide the stock value by the number of shares outstanding. Compared to the current share price of S$3.0, the company appears to be slightly undervalued, at a discount of 22% to the current share price. However, evaluation is an imprecise measure and is more like a telescope. After moving a few degrees, you will eventually reach another galaxy. Please keep this in mind.

Important prerequisites

Now, the most important input to discounted cash flows is the discount rate and, of course, the actual cash flows. You are not required to agree to these inputs. I encourage you to redo the calculations yourself and give it a try. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering CapitaLand Investment as a potential shareholder, the cost of capital is used as the discount rate, rather than the cost of capital taking into account debt (or weighted average cost of capital, WACC). For this calculation, we used 10.0% based on a leverage beta of 1.588. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values ​​are derived from industry average beta values ​​for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.

SWOT analysis of CapitaLand investment

strength

Weakness

opportunity

threat

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Valuation is only one side of the coin in building an investment thesis, and ideally it should never be the only analytical element scrutinized about a company. It is not possible to obtain a reliable valuation with the DCF model. If possible, it’s a good idea to apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in a company’s cost of equity or risk-free rate can have a significant impact on valuations. Why is the stock price below its intrinsic value? We’ve put together three relevant things to evaluate about your CapitaLand investment.

1. risk: For example, I discovered the following: 4 warning signs for CapitaLand investing (1 is not very good to us!) Here’s what you need to know before investing.

2. future earnings: How does 9CI’s growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.

3. Other high quality alternatives: Do you like good all-rounders? Explore our interactive list of quality stocks to figure out what else you’re missing.

PS. The Simply Wall St app performs daily discounted cash flow valuations for all SGX stocks. If you want to know the calculations for other stocks, please search here.

Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.