Jimmy Ng asked 3 years ago
Hi Peter & KC,
Good day!
Would like to get your opinion regarding my analysis on Poh Huat Resources.
Here’s the link to my analysis:
https://drive.google.com/file/d/1j2cOuh9JMR1lpzyhGWxOY3ZiQMz2giDK/view?usp=sharing
In Sheet 1, the top part is basically copy/paste of raw data from Chart View Plus. Followed by ratio analysis to determine the performance or health check ratios.
At the bottom part, there are intrinsic value calculations.
In Sheet 2, I’m trying out DCF analysis (quite new to it).
Please help to check my analysis and comment if there’s any errors or shortfalls. I really need a 3rd person to spot my mistakes and comment on it.
My fundamental of intrinsic value analysis is based on your (ROE-g)/(k-g).
I understand that intrinsic value is not an absolute value, as the result is based on our input (assumptions).
At some point, I started to think about other methods of IV analysis. Simply because I guess no 1 style of kungfu can beat the whole world (no 1 method can suit all businesses)
So far I tried:
- (ROE-g)/(k-g) –> ROE based
- NOPAT + net cash –> operation performance based (curi from Nicholas Oh’s presentation)
- DCF –> free cash flow based
I find that Nicholas’ way is most of the time the least conservative. Can you share your opinion regarding different methods of analysis?
Lastly is regarding DCF analysis. I have been thinking a lot on the growth rate and discount rate assumptions.
For growth rate, I’m using the ROE x retention rate, which I think is ok.
The biggest question mark for me is how to put a suitable discount rate. I understand that discount rate = required rate of return.
However I don’t think we should always use equal rate 15% for DCF as how we did in (ROE-g)/(k-g).
I would like to have your opinion on how to determine a suitable discount rate for DCF analysis. Please help.
Thank you
Jimmy Ng
KCLau Staff answered 3 years ago
Hi Jimmy, great work.
I will have Peter to take a look at your works.
Personally, I will still use k = 15%, even for the DCF model.
I don’t see there is a difference in the required k for different models though. The reason is that the K is what we expect to get. It should be a number that compares to your other opportunities. If the FD rate is 10%, I would use an even higher k (e.g. 20%) for stocks valuation since there are risks investing in businesses.