Key Takeaways:
- Goodwill Entertainment Holding’s estimated fair value is S$0.18 based on a 2-stage free cash flow to equity model.
- The company’s current share price of S$0.16 indicates that it is trading at similar levels to its fair value estimate.
- Goodwill Entertainment Holding’s peers are currently trading at a premium of 1,441% on average.
- The discounted cash flow (DCF) model is used to estimate the intrinsic value of the company by taking the forecast future cash flows and discounting them back to today’s value.
Introduction to Goodwill Entertainment Holding’s Valuation
Goodwill Entertainment Holding Limited (Catalist:GEH) is a company that has been analyzed using the discounted cash flow (DCF) model to estimate its intrinsic value. The DCF model is a tool used to calculate the present value of future cash flows, and it is based on the idea that a dollar today is more valuable than a dollar in the future. In this analysis, we use a 2-stage model, which means we have two different periods of growth rates for the company’s cash flows. The first stage is generally higher growth, and the second stage is a lower growth phase.
Estimating Future Cash Flows
To estimate the future cash flows of Goodwill Entertainment Holding, we need to extrapolate the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow over this period. This is to reflect that growth tends to slow more in the early years than it does in later years. The estimated future cash flows for Goodwill Entertainment Holding are as follows: S$5.66m in 2026, S$5.26m in 2027, S$5.04m in 2028, S$4.93m in 2029, S$4.89m in 2030, S$4.90m in 2031, S$4.94m in 2032, S$5.01m in 2033, S$5.10m in 2034, and S$5.19m in 2035.
Calculating Present Value
We then calculate the present value of these future cash flows by discounting them back to today’s value using a cost of equity of 8.5%. The present value of the 10-year cash flow is S$34m. We also calculate the terminal value, which accounts for all future cash flows beyond the first stage. The terminal value is S$88m, and the present value of the terminal value is S$39m. The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$72m.
Intrinsic Value Per Share
To get the intrinsic value per share, we divide the total value by the total number of shares outstanding. The intrinsic value per share is S$0.18, which is slightly higher than the current share price of S$0.16. This indicates that the company is trading at similar levels to its fair value estimate.
Comparison to Peers
Goodwill Entertainment Holding’s peers are currently trading at a premium of 1,441% on average. This suggests that the company may be undervalued compared to its peers.
Limitations of the DCF Model
The DCF model is not a perfect tool for estimating the intrinsic value of a company. It does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Additionally, the discount rate and the actual cash flows are the most important inputs to a discounted cash flow, and if you don’t agree with these results, you can try recalculating the intrinsic value using different assumptions.
Conclusion
In conclusion, Goodwill Entertainment Holding’s estimated fair value is S$0.18 based on a 2-stage free cash flow to equity model. The company’s current share price of S$0.16 indicates that it is trading at similar levels to its fair value estimate. However, the DCF model is not a perfect tool, and it is essential to consider other factors, such as the company’s cost of equity, the risk-free rate, and the possible cyclicality of the industry, when estimating the intrinsic value of a company.
