SGN (ASX) Ann: Change in substantial holding

Originally posted by difm ↑

Need more of a refresher to my uni days, but I think the dividend growth model may or may not be the best tool to value a stock. Firstly and again it's been a very long time, the assumptions made:

-assuming that growth is perpetual (surely it'll stop somewhere)
-does not factor in time value of money
-it's too sensitive to the dividend paid
-does not factor in FCF and debt
-the required return on equity needs to factor in capm and what is the beta for sgh I have no idea, but I think roe will be quite high for a risky stock.
-it's a very simple calculation and any changes to the variables will greatly affect the calculation

I'm almost treating sgh as a gold stock, and their ability to generate cash (dcf) and how they service their debts, and payback period. It's a more conservative approach then normal eps valuation, and my target is more ~$6, if I use eps then it'll be more $8.

Either way I think we both agree at $3 it's undervalue, and if there is some weakness in share price tomorrow I might top up a little, I don't like to use my margin loan, but maybe.

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The model does assume time value of money but it also reliant on a constant growth of dividends and very sensitive to changing either discount or growth - then again the same can be said for any value model. FCF and debt is irrelevant in this model because the only thing determined is at what rate will dividends grow. Dividends have to be paid out of cash after interest paid so that can be ignored.

Any model used to attempt a company value is highly sensitive to its inputs. For that reason I don't pay much attention to the absolute figure, it is just one thing in many to view whether a stock is underpriced. To be honest I rely more on management and history of meeting guidance. So when I say $12, I don't think that is what the SP should be it is more a case of that is the direction it should be heading towards all things equal. And stocks with a growth runway can quickly overshoot.

DCF is, I would argue even more susceptible to error. There are numerous variables trying to predict. This is why I like simplicity in dividend model. Just gives a feel for it and hours working on a DCF doesn't necessarily give a more precise result, may think it does due to sophisticated nature of workings but I don't think it does in the real world. After all, dividends are directly related to earnings so if believe the company's growth in dividends promise that suggests = growth in earnings.

Truth is I bet we will both be more than happy at this stage when it reaches $4. Then $6 gives another headache, do we say that is it for now or are buyers still willing to push on from there - time will tell.