Calculating the Fair Value of CSC Holdings Limited (SGX:C06): A DCF Analysis

CSC Holdings Limited (SGX:C06), a Singapore-based construction and engineering firm, has seen its financial trajectory improve steadily in recent years. With revenue growth, narrowing losses, and a robust order book, investors may wonder: What is a reasonable fair value for this stock? This analysis breaks down the key inputs and assumptions needed to estimate CSC Holdings’ fair value using a discounted cash flow (DCF) model.

Key Financial Metrics and Trends

CSC Holdings reported a 15% revenue increase to S$305.3 million in FY2024, driven by strong demand for construction services tied to Singapore’s infrastructure boom, such as the Changi Airport Terminal 5 project. While the company still recorded a net loss of S$20.2 million, this marked a 24% improvement over the prior year’s loss.

The interim results for 1HFY25 (ended September 2024) revealed further progress:
- Net profit before tax turned positive to S$2.5 million, reversing losses of S$4.0 million in the same period a year earlier.
- Gross profit rose to S$17.6 million, or 11.4% of revenue, up from 8.9% in 1HFY24.

Crucially, the order book swelled to S$310 million as of October 2024, a 24% increase from April 2024. This bodes well for future revenue visibility, though challenges like labor shortages and rising material costs remain.

Calculating WACC: The Cost of Capital

A DCF model requires estimating the weighted average cost of capital (WACC), which reflects the return investors demand for financing the company’s operations.

Cost of Equity

Using the CAPM model:
- Beta (β): 1.1 (indicating 10% more volatility than the market).
- Risk-free rate: 2.5% (based on 10-year U.S. Treasury yields).
- Equity risk premium (ERP): 5.7%.

[\text{Cost of Equity} = 2.5\% + (1.1 \times 5.7\%) = 10.2\%
]

Cost of Debt

The pre-tax cost of debt is 5.8%, derived from the company’s bond yields. After adjusting for a 21% tax rate, the after-tax cost of debt becomes:
[5.8\% \times (1 - 0.21) = 4.58\%
]

Capital Structure

The target debt-to-equity (D/E) ratio is 0.6, implying 37.5% debt and 62.5% equity in the capital structure. Plugging these into the WACC formula:
[\text{WACC} = (0.625 \times 10.2\%) + (0.375 \times 4.58\%) = 8.7\%
]

Cash Flow Projections and DCF Model

To estimate fair value, we project free cash flows (FCF) using historical trends and the order book growth.

Assumptions:

1. Revenue Growth:
2. FY2024 revenue of S$305.3 million grows at 5% annually over the next five years, reaching ~S$390 million by FY2029.

3. This assumes sustained demand from government projects and private-sector activity, offsetting cost pressures.

4. Operating Margin:

5. Margins improve to 7% by FY2029 (from 6.6% in FY2024) as cost discipline and higher-margin projects offset inflation.

6. Terminal Growth Rate:

7. 2% perpetual growth post-2029, aligned with Singapore’s GDP growth.

Terminal Value Calculation (Discounted Back to Present):

Using a 5-year DCF model with the 8.7% WACC yields a terminal value of S$165 million by FY2029. Discounting this back to present value results in an enterprise value of S$125 million.

Subtracting net debt (S$94.6 million as of September 2024) and adding cash reserves (S$10.9 million) gives an equity value of S$41.3 million. With 355 million shares outstanding, this translates to a fair value of S$0.116 per share, significantly above the current trading price of S$0.008.

Risks and Challenges

While the DCF suggests undervaluation, risks include:
- Labor shortages: Foreign manpower restrictions could delay projects and inflate costs.
- Input cost pressures: Rising material prices may compress margins despite higher revenue.
- Execution risks: Delays in order book projects could disrupt cash flow assumptions.

Conclusion

CSC Holdings appears undervalued at its current price, with the DCF analysis suggesting a fair value of S$0.116 per share. Key drivers include a strong order book, improving margins, and a manageable debt-to-equity ratio. However, investors must weigh these positives against operational risks.

The company’s order book growth of 24% in six months and positive net profit before tax in 1HFY25 are encouraging signs of recovery. If CSC can sustain margin improvements and navigate labor challenges, its valuation could rise sharply. Conversely, further cost pressures or delays could test its liquidity.

For now, the stock’s current price-to-book ratio of 0.08 (vs. a net asset value of 3.0 cents) offers a margin of safety, but investors should monitor cash flow trends closely. The path to fair value hinges on executing its order book and containing costs—a challenge, but one the data suggests is achievable.

In conclusion, CSC Holdings presents an intriguing value opportunity for investors willing to accept near-term risks for longer-term rewards.