I recently have some time on my hand, so I did some catch up to my previous article about 7 steps in determining value stock which missed out the last step. I have created a spread sheet to calculate the stock intrinsic value.
The steps to calculate stock intrinsic value, also known as fair value, is by summing up 10 years of future net operating incomes that is discounted to present value. I use 10 years assuming that no company will last forever and remember that present value of money is always more valuable than value of money in future of exact amount. In order to calculate present value of money in N year in the future, we simply multiply the amount by 1/1.04N (to the power of N) where N is number of years. To make thing simpler, think of 1/1.04N as factor of money depreciation over a number of years. Then I assume a risk free interest rate of 4% (the current risk free interest rate is ridiculously low which is less than 1%, so I adjusted the percentage to a more realistic depreciation rate of 4%)
But wait. How do I know the company future operating income if it hasn’t come to past? Good question, we seriously won’t know how the company will fare in the future except looking at the historical performance. From historical data, you can get the compound annualized growth rate, and then use the key figure to derive the estimate operating income for the future 10 years.
Recently Genting’s stock has been beaten down a bit from RM7.60 to RM6.50 now. So I took some liberty to find out Genting stock’s fair price. I plugged some of Genting’s financial key figures into my spread sheet. First I extract their past six years of net cash from operating income:
| Historical Years | Operating Incomes |
| 2004 | 1,685,900,000 |
| 2005 | 2,019,100,000 |
| 2006 | 2,597,300,000 |
| 2007 | 2,844,100,000 |
| 2008 | 2,518,050,000 |
| 2009 | 2,551,828,000 |
From year 2004 RM 1,685 millions, the operating income has grew up to RM2,551 million in year 2009. The compound annualized growth rate is 7.15%. I then use 7.15% as the average growth rate to estimate Genting’s future operating incomes, I arrive at:
| Fiscal Years | Projected Operating Incomes |
| 2010 | 2,743,215,100.00 |
| 2011 | 2,948,956,232.50 |
| 2012 | 3,170,127,949.94 |
| 2013 | 3,407,887,546.18 |
| 2014 | 3,663,479,112.15 |
| 2015 | 3,938,240,045.56 |
| 2016 | 4,233,608,048.97 |
| 2017 | 4,551,128,652.65 |
| 2018 | 4,892,463,301.60 |
| 2019 | 5,259,398,049.22 |
Remember that, money in the future worth less in the present? So we need to multiply each year operating income by the depreciation factor (1/1.04N), then we arrived at:
| Fiscal Years | Discounted Value |
| 2010 | $2,637,706,826.92 |
| 2011 | $2,726,475,806.68 |
| 2012 | $2,818,232,204.02 |
| 2013 | $2,913,076,557.04 |
| 2014 | $3,011,112,787.32 |
| 2015 | $3,112,448,313.82 |
| 2016 | $3,217,194,170.53 |
| 2017 | $3,325,465,128.19 |
| 2018 | $3,437,379,820.01 |
| 2019 | $3,553,060,871.64 |
Notice that estimated operating income in 2019 before and after depreciation factor has a huge different. RM 3,553 vs. 5,259 millions before depreciation. Now sum up the operating incomes from 2010 till 2019, we get RM 30,752 millions, the total operating incomes of the next 10 years.
Now, in order to get one share’s intrinsic value/fair value, we only need to divide RM 30,752 millions by number of share issued in the public, in this case, roughly 3.8 billions shares. The result is RM8.30, versus current market price of RM 6.5.
By looking at the stock intrinsic value vs. market price, there is a margin of safety of RM 1.80 if we purchase the stock at RM6.50. However, to arrive at RM 8.30, we must assume that the earning will be steadily increasing for the next 10 years, a slightly lower earning in one of those years, we will need to readjust the fair value accordingly. On the other hand, if the earning growth rate jumps higher, then the fair value will be higher as well (such as when Genting Singapore starts to fly). Of course there might be some other factors or developments in the company that could largely affect the fair value per share such as change in number of share outstanding or some other factors that you deem might hurt company’s future prospect, you can always discount the fair price accordingly.