Estimating the intrinsic value of Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC)

Key findings

• Using the 2-step free cash flow to equity, the fair value estimate of Kumpulan H & L High-Tech Berhad is RM1.09

• Kumpulan H & L High-Tech Berhad’s share price of RM0.88 suggests that the price is trading at a similar level to the estimated fair value.

• The average premium for Kumpulan H & L High-Tech Berhad’s competitors is currently 138%

How far is Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by projecting its future cash flows and then discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. There’s actually not too much involved in it, even though it may seem quite complex.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for Kumpulan H & L High-Tech Berhad

The method

We will use a two-stage DCF model which, as the name suggests, takes into account two phases of growth. The first stage is generally a higher growth phase that stabilizes towards the terminal value captured in the second “steady growth” stage. First, we need to obtain estimates of the next ten years of cash flows. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage and that companies with growing free cash flow will slow their growth rate over this period. We do this to account for the fact that growth tends to slow more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. So we discount the value of these future cash flows to their estimated value in today’s dollars:

The story goes on

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 61 million RM

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. 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 Treasury yield of 3.6%. We discount the terminal cash flows to today’s value at a cost of equity of 11%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = RM13m × (1 + 3.6%) ÷ (11% – 3.6%) = RM186m

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 186 million RM ÷ (1 + 11%)¹⁰= 68 million RM

The total value or equity value is then the sum of the present value of future cash flows, which in this case is RM129 million. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.9, the company appears roughly fairly valued at a 20% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Kumpulan H & L High-Tech Berhad as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 11% which is based on a leveraged beta of 1.112. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0 which is a reasonable range for a stable company.

SWOT Analysis for Kumpulan H & L High-Tech Berhad

Strength

weakness

Opportunity

Danger

Looking ahead:

Although the valuation of a company is important, it is only one of many factors you need to evaluate a company. The DCF model is not a perfect tool for stock valuation. It is best to apply different cases and assumptions and see how they affect the valuation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For Kumpulan H & L High-Tech Berhad, we have compiled three basic elements that you should examine in more detail:

1. Risks: You should be aware 2 warning signs for Kumpulan H & L High-Tech Berhad we uncovered before considering investing in the company.

2. Other high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!

3. More top analyst tips: Want to know what the analysts think? Take a look at our interactive list of analyst recommended stocks and find out which stocks they think could have attractive future prospects!

PS. Simply Wall St updates its DCF calculation for each Malaysian stock daily, so if you want to find out the intrinsic value of any other stock, just search here.

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This Simply Wall St article is of a general nature. We comment based solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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