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QuestionsCategory: Valuation QuadrantAlpha lab and Dividend Machines Professional
Jerry Ling asked 5 years ago

Hi there, 
I am currently evaluating HEIM (3255), because it seems like a good dividend stock. Need advise below:

  1. This company has predictable cash flow. So I choose to use DCF for valuation. May I know when I should use FCF or OCF? BTW, I am using FCF for evaluation. 
    FCF – OCF – CAPEX (hope this is correct)
  2. I read from another thread you mentioned for mature companies, use DCF. For smaller companies, use Discounted EPS. How to choose between those 2? 
  3. For predictable cash flow, we can use DCF. How to define predictable? My definition is stable and no big fluctuation between the years. 
  4. This company’s EPS is quite stable also. Averaging 60-70 cents per share, can i use that with average PE?

    Thank you. :)

    Regards,
    Jerry 

1 Answers
Victor Chng answered 5 years ago

Hi Jerry,
 

  1. Your FCF formula is correct. You can use FCF for DCF valuation but instead of projecting 10 years, you can project 20 years as the business are generally more stable in nature.
  2. Yes you are right on the definition of predictable cash flow
  3. Yes you can use average PE and there is another way to do valuation for HEIM. The company is well known to investor and there is a certain PE range that is tag to the business. Find out what is the average PE range of HEIM and buy only at the average PE range or low. Average PE trading range = fair value, anything lower is undervalue.