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How much is QAF Limited worth using DCF?

Tuesday, February 28, 2017


Warren Buffett on Interest Rates & Valuations.

Many people ask me what is a fair price for QAF Limited. Obviously, all of us will have our own answer.

Of course, depending on Mr. Market's mood, share price could go higher or lower. There is no accounting for prices or so I have heard people say.

What we can try to find out is the intrinsic value to help us make sense of the price offered by Mr. Market. After all, price is what we pay and value is what we get.

I decided to play around with some numbers to see what QAF Limited's intrinsic value should be using Discounted Cash Flow (DCF), a process which is made much easier using an online calculator I found: 
http://www.moneychimp.com/articles/valuation/dcf.htm

I will try to be more conservative because I don't know all there is to know. Instead of entering earnings per share (EPS) as 10.9c, I will enter 10c.

In scenario 1, to be even more conservative, I assume zero growth in QAF Limited's earnings and a risk free rate of 3% which is a bit higher than what is offered by a 30 years bond issued by the Singapore Government now. The risk free rate is what I am going to use as the discount rate for DCF calculation.

Stock value per share: $3.33

In scenario 2, to be even more conservative, I assume a higher interest rate environment with a risk free rate of 5%. Again, I assume zero growth in QAF Limited's earnings.
Stock value per share: $2.00

In scenario 3, to be more realistic, I will assume some growth in earnings. After all, QAF Limited's EPS has grown over the last few years. I will use a risk free rate of 5% in this scenario for that conservative element.
Stock value per share: $2.50.

Now, is QAF Limited's fair value at least $2.00 a share? You blur? Don't look at me. I am only a blogger. What do I know?

Read more about DCF: HERE.

Related post:
What is QAF Limited really worth?

7 comments:

wanchai30 said...

Hi AK,

Probably a very amateur question but why did QAF dropped so much within these 2 days?

Thanks!
Pat

CharlieK said...

For DCF, the discount rate used should be based on the expected rate of return for the investment you are considering. The riskier the investment the higher the discount rate should be to factor in the risk premium. Thus it would not make sense to discount at the risk free rate. The traditional way is to use the capm model but you can also set your own discount rate based on your perception of the riskiness of the stock you are investing in. If you are trying to be conservative, you should assume a higher discount rate (not lower) to ensure a greater margin of safety.

AK71 said...

Hi Pat,

I could probably guess at the reason but I don't know if it is the reason. So, I shan't bother. I will say that it is anyone's guess. ;)

AK71 said...

Hi Charlie,

Thanks for sharing your opinion. :)

Ben said...

Hi AK,

I really enjoy reading your blog - please keep up the great work.

I was under the impression that free cash flow is usually used for DCF calculations, and not EPS. I haven't done a comparison for QAF, but it would be interesting to see if the same or similar valuation is reached if free cash flow is used.

As for Charlie's comment above, I don't quite agree - I think you correctly used a conservative 3% discount rate. This, I believe, represents the time value of money as explained in the URL you posted.

AK71 said...

Hi Ben,

I am sure there is a purist's approach to DCF, like with many other things. Of course, there are other approaches as well which give us plenty of room for discussion.

The reason why I don't usually use DCF is because it can be quite subjective. Depending on the assumptions we decide to make, we will get different fair values.

I think I have managed to show how in this blog. :)

EK said...

Hi Ben,

Yup. I think the calculator is showing Discounted Earning Method. Basically you need to use current eps and estimate the future earning by certain %. By applying a discounted % to the future earnings; due to inflation and other reasons, you discount it back to current earnings to estimate the intrinsic value of "now". I am getting a value of $1 by projecting a 5% annual growth and using cpf special account interest of 4.5% as discounted factor. of course, mine approach is quite conservative. and $1.5 if projecting 10% growth and cpf ordinary account of 2.5% as discount factor. These values are serve as reference only.

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