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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » DCF based projections

DCF based projections

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1DCF based projections Empty DCF based projections Mon Sep 16, 2013 9:11 am

hunter

hunter
Moderator
Moderator
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.

DCF based projections Brwn_d10

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.



Last edited by slstock on Mon Sep 16, 2013 3:08 pm; edited 1 time in total (Reason for editing : Hunter, I just started a new topic to recognize your work. Slstock)

2DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 12:57 pm

Jana1


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@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.

DCF based projections Brwn_d10

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??

3DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 1:17 pm

Jiggysaurus

Jiggysaurus
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@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.

DCF based projections Brwn_d10

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.

4DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 1:39 pm

hunter

hunter
Moderator
Moderator
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.

5DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 1:48 pm

Jiggysaurus

Jiggysaurus
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@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).

6DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 2:23 pm

hunter

hunter
Moderator
Moderator
Rolling Eyes 



Last edited by hunter on Mon Sep 16, 2013 2:32 pm; edited 1 time in total

7DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 2:28 pm

hunter

hunter
Moderator
Moderator
@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.)

DCF based projections Tjl_dc10

8DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 3:04 pm

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
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.

DCF based projections Brwn_d10

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.

9DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 3:07 pm

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Hunter, I just started a new topic to recognize your work which was inside another thread.

10DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 3:15 pm

sriranga

sriranga
Co-Admin
@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

http://sharemarket-srilanka.blogspot.co.uk/

11DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 3:41 pm

hunter

hunter
Moderator
Moderator
@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). Wink 


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.

12DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 5:04 pm

Dileepa


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@hunter wrote:
Please do share your views/inputs and comments, I highly appreciate them.
Good effort hunter, cheers 
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?

13DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 5:36 pm

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Research about FCF --- free cash flow..

14DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 5:44 pm

K.Haputantri

K.Haputantri
Co-Admin
Good effort hunter. Continue the good work.

15DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 7:32 pm

hunter

hunter
Moderator
Moderator
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.

16DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 7:42 pm

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
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/

17DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 7:54 pm

nihal123

nihal123
Manager - Equity Analytics
Manager - Equity Analytics
Good work hunter
Continue it.

18DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 8:08 pm

sikka89


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@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.

DCF based projections Brwn_d10

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.

19DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 8:29 pm

Fresher


Moderator
Moderator
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

20DCF based projections Empty Re: DCF based projections Mon Sep 16, 2013 8:41 pm

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
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? cheers 

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

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