Key information
- The estimated fair value of Atour Lifestyle Holdings is US$41.98 based on a 2-step free cash flow to equity basis.
- Atour Lifestyle Holdings is estimated to be undervalued by 33% based on the current stock price of US$27.99.
- Analysts’ price target of CN¥33.09 for ATAT is 21% lower than our estimate of fair value
Today we will review one way to estimate the intrinsic value of Atour Lifestyle Holdings Limited (NASDAQ: ATAT) by taking expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. This may sound complicated, but it’s actually quite simple!
Companies can be valued in many ways, which is why we draw your attention to the fact that a DCF is not perfect for all situations. If you still have burning questions about this type of valuation, take a look at the Simply Wall St Analysis Model.
Check out our latest analysis for Atour Lifestyle Holdings.
Analyze the numbers
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is generally a period of higher growth that levels off towards the terminal value, captured in the second period of “steady growth”. To begin, we need to estimate the cash flows for the next ten years. Where possible we use analyst estimates, but when these are not available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of contraction, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect the fact that growth tends to slow more in the early years than in later years.
Generally, we assume that a dollar today is more valuable than a dollar in the future. We must therefore discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
| 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
| Leveraged FCF (CN¥, millions) | CN¥1.91 billion | CN¥2.16 billion | CN¥2.35 billion | 2.51 billion CN | CN¥2.66 billion | CN¥2.78 billion | 2.89 billion CN | CN¥3.00 | CN¥3.10 billion | CN¥3.20 billion |
| Source of growth rate estimate | Analyst x2 | Analyst x1 | Estimated at 8.74% | Estimated at 6.90% | Estimated at 5.62% | Estimated at 4.72% | Estimated at 4.09% | Estimated at 3.65% | Estimated at 3.34% | Estimated at 3.12% |
| Present value (CN¥, millions) discounted at 8.4% | CN¥1.8k | CN¥1.8k | CN¥1.8k | CN¥1.8k | CN¥1.8k | CN¥1.7k | CN¥1.6k | CN¥1.6k | 1.5k CN¥ | CN¥1.4k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year Present Value of Cash Flows (PVCF) = 17 billion yen
We now need to calculate the Terminal Value, which represents all future cash flows after this ten year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.6%. We discount the terminal cash flows to their present value at a cost of equity of 8.4%.
Terminal value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥3.2b× (1 + 2.6%) ÷ (8.4% – 2.6%) = CN¥57b
Current Value of Terminal Value (PVTV)= television / (1 + r)10= CN¥57b÷ (1 + 8.4%)10= 25 billion yen
The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is CN¥42 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US$28.0, the company appears to be quite a good value at a 33% discount to the current share price. The assumptions of any calculation have a large impact on the valuation, so it is best to consider this a rough estimate, not precise to the last cent.
Important assumptions
We emphasize that the most important elements in obtaining a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is developing your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, and therefore does not give a complete picture of a company’s potential performance. Since we consider Atour Lifestyle Holdings as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which represents debt. In this calculation, we used 8.4%, based on a leveraged beta of 1.163. Beta is a measure of a stock’s volatility relative to the market as a whole. We obtain our beta from the industry average beta of comparable companies globally, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable company.
SWOT Analysis for Atour Lifestyle Holdings
- Profit growth over the past year has outpaced the industry.
- Debt is not considered a risk.
- Dividends are covered by profits and cash flow.
- The dividend is low compared to the top 25% of dividend payers in the hospitality market.
- Annual profits are expected to grow faster than the US market.
- Good value based on P/E ratio and estimated fair value.
- No apparent threat visible to ATAT.
Next steps:
Valuation is only one side of the coin when it comes to developing your investment thesis, and it shouldn’t be the only metric you look at when researching a company. It is not possible to obtain a foolproof valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or risk-free rate can have a significant impact on valuation. What is the reason the stock price is below intrinsic value? For Atour Lifestyle Holdings, we have compiled three relevant factors that you should consider:
- Financial health: Does ATAT have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future earnings: How does ATAT’s growth rate compare to its peers and the market as a whole? Deepen the analyst consensus for the years to come by interacting with our free chart of analyst growth expectations.
- Other Strong Companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with strong business fundamentals to see if there are any other businesses you might not have thought of!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock, simply search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.