Help with intrinsic value calculating

[KonyakuJelly]

Hello fellow value buddies,

I am a super greenhorn in investing. Currently, I've only been watching videos and reading some books regarding value investing. Recently, I looked at T T J Holdings and Valuetronics to apply what I've learnt. I tried to use a simple intrinsic value calculation but the results I got is so positive I can't wrap my head around it.

For T T J Holdings, it is currently selling at $0.40 but using book growth and dcf calculation, I got $2.44 and $1.55 intrinsic value respectively.

For Valuetronics, it is currently selling at $0.42 but using the book growth and dcf calculation method, I got an intrinsic value of $2.40 and $2.83 respectively. 

Are these valuations fair or overstated? If overstated, what is the reasoning behind/am I getting anything wrong? 

Thanks for reading and I hope to hear your views.

[CityFarmer]

First of all, you need to give parameter of DCF e.g. discount rate, growth rate, and terminal value, before any willing buddies to give a useful comment.

What is the book growth? the growth of booked value?

[KonyakuJelly]

Dear CityFarmer,

Thank you for your reply. For DCF, my inputs are:

- Cash flow for the company
- Average cash flow growth rate of said cash flow
- Discount rate of 10%
- Over 10 years
- Perpetuity growth of 3%

As for book growth, yes I was referring to the growth of book value per share.

Is there any more information I'll need to provide?

I hope to hear from you soon!

[CityFarmer]

OK, let's explore. Instead of working on your model, I would like to use a simplified, yet useful model here. You can compare and find out the differences. Let's take TTJ as example

Since the OCF is volatile due to its working capital, an 5Y average OCF is used, and estimated as $21 million, with a replacement capex of $2 million, thus historical FCF is about $19 million. Assuming the FCF remains the same for the next 5 years i.e. growth is zero, discount rate is 10%. I am using a more reasonable terminal value, i.e. 10x of 5th year FCF. The valuation is about 60 cents per share. You may know that the dorm biz of the company, is expiring in 2 years time. Let's take a 40% cut, that ended with a 36 cents per share, which is close enough to its market price now.

There are few comments on your model
- A LT growth rate of 3%, with a discount rate of 10%, is equivalent to a terminal value of about 15x on 5th year FCF, which is pretty pricey.
- You didn't give the FCF number, but I guess you are using the FY2015 OCF and CAPEX. I would suggest an average, rather than a single good year with TTJ biz model.

All comments are welcomed.

(vested in TTJ)

[gzbkel]

- A LT growth rate of 3%, with a discount rate of 10%, is equivalent to a terminal value of about 15x on 5th year FCF, which is pretty pricey.

Hi CF,
Sorry I don't get the relationship between growth rate, discount rate, and the terminal value. How did you get 15x? Can you elaborate on the calculation?
Thanks!

[CityFarmer]

- A LT growth rate of 3%, with a discount rate of 10%, is equivalent to a terminal value of about 15x on 5th year FCF, which is pretty pricey.

Hi CF,
Sorry I don't get the relationship between growth rate, discount rate, and the terminal value. How did you get 15x? Can you elaborate on the calculation?
Thanks!

Based on the terminal value formula, TV = Last CF * (1+Growth Rate) / (Discount Rate - Growth Rate). Base on a normalized CF of 100, the TV is about 1470, which is close to 15x, right?

I normally don't use the formula, but I guess KonyakuJelly used it. I will normally take a multiple, which easier for a reality check.  

[gzbkel]

^^ Got it, thank you!