DCF based projections

Well, if you gents are interested, I am in the process of developing a more effective way of evaluating a share. I would call it 'DCF projection' of share value. Here is the DCF projection of BRWN.N along with some other shares in the same price range.



In the graph, X-axis represents the years in to the future. Y-Axis represents the value. So, basically, with the current NAV, EPS and dividend payout, BRWN has a high book value but considering 20 years into the future, it's present value is ~Rs. 50/-. Ideally, if the whole line (representing the share) was above the current market price, it would be very attractive to majority of the investors.

However in my view, it's not that bad as some of the other shares (not shown here). On the other hand, there are more attractive shares as well.

BTW: I would like to get your view on this analysis technique.

hunter wrote:Well, if you gents are interested, I am in the process of developing a more effective way of evaluating a share. I would call it 'DCF projection' of share value. Here is the DCF projection of BRWN.N along with some other shares in the same price range.



In the graph, X-axis represents the years in to the future. Y-Axis represents the value. So, basically, with the current NAV, EPS and dividend payout, BRWN has a high book value but considering 20 years into the future, it's present value is ~Rs. 50/-. Ideally, if the whole line (representing the share) was above the current market price, it would be very attractive to majority of the investors.

However in my view, it's not that bad as some of the other shares (not shown here). On the other hand, there are more attractive shares as well.

BTW: I would like to get your view on this analysis technique.

Not sure about your analysis. I am pretty sure BRwn will reach its previous peak 400 within next 5 years. can ur model say so??

hunter wrote:Well, if you gents are interested, I am in the process of developing a more effective way of evaluating a share. I would call it 'DCF projection' of share value. Here is the DCF projection of BRWN.N along with some other shares in the same price range.



In the graph, X-axis represents the years in to the future. Y-Axis represents the value. So, basically, with the current NAV, EPS and dividend payout, BRWN has a high book value but considering 20 years into the future, it's present value is ~Rs. 50/-. Ideally, if the whole line (representing the share) was above the current market price, it would be very attractive to majority of the investors.

However in my view, it's not that bad as some of the other shares (not shown here). On the other hand, there are more attractive shares as well.

BTW: I would like to get your view on this analysis technique.

What you've done is very interesting and kudos for trying something new instead of saying X will to Y like some others in the forum.
But in theory at least the whole point of DCF is discounting back future CASH FLOWS that are relevant to the shareholders. Using DCF only on NAV and EPS means you are leaving out of the value on the table (like what seems to have happened with your BRWN model). (Free) Cash flows tend to be much higher than EPS in certain cases due to capex/working cap requirements etc.

Jana1, The model takes into account recent past EPS and dividend. If the near future earnings increases, the outlook will change a lot.

Jiggysaurus, I like to incorporate your ideas in to this model. Can you give me more details on what you are referring to and how we can extract specific values related to 'Cash flows'?
Right now, I have taken 3 (averaged) figures; NAVPS, EPS and DPS.

hunter wrote:Jana1, The model takes into account recent past EPS and dividend. If the near future earnings increases, the outlook will change a lot.

Jiggysaurus, I like to incorporate your ideas in to this model. Can you give me more details on what you are referring to and how we can extract specific values related to 'Cash flows'?
Right now, I have taken 3 (averaged) figures; NAVPS, EPS and DPS.

By taking the averaged value of your three figures alone, without taking into account future forecasts/earnings changes the line on your graph will always keep falling right? Then in that case why not just straightaway take the average of the 3 figures?
Discounting it is just redundant if you don't factor in future changes (looking at year 1 or year 20 in your graph is basically the same thing).

 

Jiggysaurus wrote:

hunter wrote:Jana1, The model takes into account recent past EPS and dividend. If the near future earnings increases, the outlook will change a lot.

Jiggysaurus, I like to incorporate your ideas in to this model. Can you give me more details on what you are referring to and how we can extract specific values related to 'Cash flows'?
Right now, I have taken 3 (averaged) figures; NAVPS, EPS and DPS.

By taking the averaged value of your three figures alone, without taking into account future forecasts/earnings changes the line on your graph will always keep falling right? Then in that case why not just straightaway take the average of the 3 figures?
Discounting it is just redundant if you don't factor in future changes (looking at year 1 or year 20 in your graph is basically the same thing).

Nope, The graph doesn't always fall if the Dividend and earning rates are high compared to NAV (If ROE is higher than discount rate). In fact, we can use how far the line is falling in order to compare shares. The projection gives a better way of comparing business performances.
(I used to do what you suggest in the past (take the average of 3 figures), but it wouldn't give the correct picture.)

I agree the model ignores future estimates; that;s a limitation. However, my requirement here is to see how well the company performs right now without clinging on to a single figure like NAV (which can be manipulated; for example in TWOD). Also wanted to get rid of any subjective views such as how well they do in future.

By looking at the graph below, I would say, for shareholders, TJL is better  than TFIL; Even if NAV and EPS of the latter are higher. (The averaged one figure would not suggest so.)

Good job for startung something different. . This should really be a separate thread.

I was interested in DCF projections but never found time to do some analysis.

One thing, with DCF should we get projected future values that are higher than present for good companies?
Some brokers derive share values based DCF . If value goes down every year, we cannot get an idea of the future target prices right.
Looks from the graph most companies you assessed are going downhill due to is.

I think you need to dig deeper to find some crucial parameters . Also we need to be able to project future earnings. It might be a bit more complicated than it looks. Though some companies might show negative cash flows now, they can turn out to be positve in few quarters time.

Anyway great start. Well done.

hunter wrote:Well, if you gents are interested, I am in the process of developing a more effective way of evaluating a share. I would call it 'DCF projection' of share value. Here is the DCF projection of BRWN.N along with some other shares in the same price range.



In the graph, X-axis represents the years in to the future. Y-Axis represents the value. So, basically, with the current NAV, EPS and dividend payout, BRWN has a high book value but considering 20 years into the future, it's present value is ~Rs. 50/-. Ideally, if the whole line (representing the share) was above the current market price, it would be very attractive to majority of the investors.

However in my view, it's not that bad as some of the other shares (not shown here). On the other hand, there are more attractive shares as well.

BTW: I would like to get your view on this analysis technique.

Hunter, I just started a new topic to recognize your work which was inside another thread.

slstock wrote:Hunter, I just started a new topic to recognize your work which was inside another thread.

Good move. Thanks Slstock.

Hunter, really appreciate your valuable commitment and Jiggysaurus input.

Regarding DCF theoretical thread please refer the following.
http://forum.srilankaequity.com/t12537-discounted-cash-flow-how-much-is-a-stock-really-worth

slstock wrote:Hunter, I just started a new topic to recognize your work which was inside another thread.

Thanks Sls, I think it is more appropriate that way. I was anyway to start a new thread about this sometime later (after developing the model a little more).  


Sri, thanks a lot for the link to the thread on DCF theory, that was very helpful reading. It actually gave me couple of new ideas.


To develop this further, apart from future estimates, I feel like paying more attention to actual free cash flow figures.
And the growth rate and deviation also can be helpful.

Please do share your views/inputs and comments, I highly appreciate them.

hunter wrote:
Please do share your views/inputs and comments, I highly appreciate them.

Good effort hunter,  
I too was very keen on DCF method some times back.
But soon lost the faith when one firm said
CTC to hit 545/= and LLUB to hit 145/= (If my memory is correct) based on DCF.
My wife is a charted accountant and she have worked on may listed companies including BRWN.
When I asked her about DCF, she said major share holders use this widely.

Two things I don't like is,
1) It take a lot of assumptions and end results do differ a lot based on those assumptions.
2) It is difficult to back test the reliability.
   Of course a forecast can be made and wait x no. of years to check the result. But it is too late.
   Is there a way to go back couple of years forecast and check against current market value?

Research about FCF --- free cash flow..

Good effort hunter. Continue the good work.

My sincere thanks to everyone who commented.

I have had very limited exposure to accounting, so, would like to clarify a certain matter. Appreciate if someone can comment on the following.

As I understand, in the long run, Earnings and Free cash flow should show the same results. Whereas FCF would show big fluctuation time to time during capital expenditure; while Earnings would smooth out the Capex through depreciation.
* Am I correct?

On the other hand, manipulation of DCF figures are difficult compared to earning figures.

Anyway, assumed no figure manipulations, averaged earnings and DCF should give us the same results in NPV calculations.
* Should it?

If so, can we use Earnings instead of Free Cash in Discounted cash flow method?

Thanks in advance if someone can comment.

Thanks mate for your effort, may be the following link could help you.
http://www.streetofwalls.com/finance-training-courses/investment-banking-technical-training/4-discounted-cash-flow/

Good work hunter
Continue it.

Jana1 wrote:

hunter wrote:Well, if you gents are interested, I am in the process of developing a more effective way of evaluating a share. I would call it 'DCF projection' of share value. Here is the DCF projection of BRWN.N along with some other shares in the same price range.



In the graph, X-axis represents the years in to the future. Y-Axis represents the value. So, basically, with the current NAV, EPS and dividend payout, BRWN has a high book value but considering 20 years into the future, it's present value is ~Rs. 50/-. Ideally, if the whole line (representing the share) was above the current market price, it would be very attractive to majority of the investors.

However in my view, it's not that bad as some of the other shares (not shown here). On the other hand, there are more attractive shares as well.

BTW: I would like to get your view on this analysis technique.

Not sure about your analysis. I am pretty sure BRwn will reach its previous peak 400 within next 5 years. can ur model say so??

Can you explain how and why it fell from 300 levels to 90.Definitely a good one to buy and hold.

Good initiative. I did not give it a complete read but judging but seems a great effort. I'll be back to read this but on first impression I'm not getting the clear picture.

Jiggy has explained much. Also as mentioned in some comments, future cash flows too depend on a lot of assumptions. Good if you can note down some of yours if possible with others' who are following can contribute

Good that u brought this up Hunter.. very nicely put and a well deserving effort.. thanks..

Just adding my two cents..
The base of any valuation is, to my understanding to know the 'value of the company' thus its equal to the asset value, debt + equity.

The four most commonly used techniques in valuation are:
1. Discounted cash flow (DCF) analysis
2. Multiples method
3. Market valuation
4. Comparable transactions method

Apart from this I'd like CAPM (Capital Asset Pricing Model). However, I've heard that the correct methods, theoretically are "discounting-based" methods. But other methods also use widely..

My belief is; earnings are more useful than dividends, NAV..

We traditionally go for companies trade below NAV (or at a certain discount to NAV) for investments. But we also forget that some companies in some industries are going at a bargain for a reason.. Say, the risk, weather conditions like in plantations and hydro power.

So then if we analyse thoroughly, we cant rely on any of the widely used techniques, can we?
Then the million dollar question is; can we blend one?  

Dont we compare same industries too? i.e. LFIN, VFIN, PLC, etc... VPEL, HPWR, FLCH, etc..

npp wrote:Good initiative.  I did not give it a complete read but judging but seems a great effort. I'll be back to read this but on first impression I'm not getting the clear picture.

Jiggy has explained much.  Also as mentioned in some comments, future cash flows too depend on a lot of assumptions. Good if you can note down some of yours if possible with others' who are following can contribute

Thanks all!!
Great ideas are coming up from everyone here. That's very encouraging.

  As you may have noticed, this topic was started accidentally and well before intended times. So it lacks my usual preamble to explain what I am talking about. Anyway, let me try to clarify a little.

I've been using (my own) different means to get an idea about the value of a share for sometime.
In the recent past, with the help of some of members, a formula was developed.

http://forum.srilankaequity.com/t29902-my-share-valuation-formula

The result was helpful. But there were limitations.
As in the case with usual DCF methods, When we calculate the present value for different projected years, the final result may differ. For example, a share may look good when 5 years are used but may look bad for 10 year projection. Then a question is coming should we use 5 years or should we use 10 years; and why?

To eliminate that confusion, I decided to find a method to give a 'snap shot' view of multiple (year) period projection. That's the reason behind initiating this tool.

For the time being, as inputs, I have used only published numbers; NAV, EPS and DPS. So the automatic assumption is, the current trend in earnings and dividends will continue in to the future. (I know that's contrary to the basis of usual DCF methods).
The discount rate used is 12%.
I have taken EPS instead of FCF; so another automatic assumption is, the remaining cash after paying divided is considered as capital expenditure. (This is also arguable).

ALSO:
Few words about how I intend to used this tool......
Right now, I remain as a medium term 'trader', therefore, I need not and do not intend to use this to judge or predict any future market price. (For that, I consider technical analysis).
But there will be many uses of this tool such as, to identify the shares with a higher chance of a price appreciation; to judge if a market price is justifiable by its value; to avoid very 'expensive' shares; and to see if a share worth averaging etc.
Another accident use I noticed was there are common characteristic of 'overvalued-high demand' shares (NEST, CTC etc).

Finally, I do not know 'DCF projection' is a good name for this tool. May be I need to think of a better name later.

hunter wrote:My sincere thanks to everyone who commented.

I have had very limited exposure to accounting, so, would like to clarify a certain matter. Appreciate if someone can comment on the following.

As I understand, in the long run, Earnings and Free cash flow should show the same results. Whereas FCF would show big fluctuation time to time during capital expenditure; while Earnings would smooth out the Capex through depreciation.
* Am I correct?

On the other hand, manipulation of DCF figures are difficult compared to earning figures.

Anyway, assumed no figure manipulations, averaged earnings and DCF should give us the same results in NPV calculations.
* Should it?

If so, can we use Earnings instead of Free Cash in Discounted cash flow method?

Thanks in advance if someone can comment.

As far as I know, these are two different things. For earnings calculation depreciation, provisions for impairment of assets and accrued expenses for the period (whether paid or not) are deducted and what ever accrued income for the period (whether realised or not) is added. All expenses and income beyond the period (irrespective of cash payout or comming in) are not added and carried forward.

However, for FCF calculation only cash and cash equivalant resources available during the period (irrespective of their applicable period) are taken.

Hunter / O thers


I am the culprit who moved Hunters embedded posts in a another thread to open a separate topic . I felt the need as Hunter should get some recognition and input.

i see you got good feedback.

But if I have made things uncomfortable Hunter, do you want me to lock this thread until you are ready ?

hunter wrote:
  As you may have noticed, this topic was started accidentally and well before intended times. So it lacks my usual preamble to explain what I am talking about. Anyway, let me try to clarify a little.

slstock wrote:Hunter / O thers


I am the culprit who moved Hunters  embedded posts  in a another thread to open a  separate topic .  I felt the need as Hunter should get some recognition and input.

i see you got good feedback.

But if I have made things uncomfortable  Hunter, do  you want me to lock this thread until you are ready ?  

hunter wrote:
  As you may have noticed, this topic was started accidentally and well before intended times. So it lacks my usual preamble to explain what I am talking about. Anyway, let me try to clarify a little.

Oh no ! Slstock, this is fine as a separate topic and it is more appropriate so now. In fact, you did a good thing as I learnt and learning from everyone's comments.
At the same time, I wanted to keep readers informed, since the topic was started accidentally, the content may be written in a little 'ad hock' manner. I feel that is also ok. (This is not going to be a PhD thesis   )

K.Haputantri wrote:

hunter wrote:My sincere thanks to everyone who commented.

I have had very limited exposure to accounting, so, would like to clarify a certain matter. Appreciate if someone can comment on the following.

As I understand, in the long run, Earnings and Free cash flow should show the same results. Whereas FCF would show big fluctuation time to time during capital expenditure; while Earnings would smooth out the Capex through depreciation.
* Am I correct?

On the other hand, manipulation of DCF figures are difficult compared to earning figures.

Anyway, assumed no figure manipulations, averaged earnings and DCF should give us the same results in NPV calculations.
* Should it?

If so, can we use Earnings instead of Free Cash in Discounted cash flow method?

Thanks in advance if someone can comment.

As far as I know, these are two different things. For earnings calculation depreciation, provisions for impairment of assets and accrued expenses for the period (whether paid or not) are deducted and what ever accrued income for the period (whether realised or not) is added. All expenses and income  beyond the period (irrespective of cash payout or comming in) are not added and carried forward.

However, for FCF calculation only cash and cash equivalant resources available during the period (irrespective of their applicable period) are taken.  

In that case, If you are correct,  EPS should be better than FCF for use in this tool. (That's what I have done anyway). Thanks for your view.