Fair value calculation of Powermatic Data Systems Limited (SGX:BCY)

Key findings

• Using the 2-step free cash flow to equity, the estimated fair value of Powermatic Data Systems is S$3.66

• With a share price of S$3.50, Powermatic Data Systems appears to be trading close to its estimated fair value

• The industry-wide discount to fair value of 19% suggests that Powermatic Data Systems’ competitors are currently trading at a larger discount

Today we’re going to walk through one way to estimate the intrinsic value of Powermatic Data Systems Limited (SGX:BCY) by taking the expected future cash flows and discounting them to today’s value. The Discounted Cash Flow (DCF) model is the tool we’ll use to do this. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Powermatic Data Systems

Processing the numbers

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company may have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. In the first stage, we need to estimate the company’s cash flows for the next ten years. 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 take into account that growth tends to slow down 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) = S$46 million

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. For various reasons, a very conservative growth rate is used that cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. In the same way as with the 10-year “growth” period, we discount future cash flows to today’s value, using a cost of equity of 6.3%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = S$6.3 million × (1 + 2.1%) ÷ (6.3% – 2.1%) = S$152 million

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= S$152 million ÷ ( 1 + 6.3 %)¹⁰= S$82 million

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is S$128 million. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of S$3.5, the company appears roughly fairly valued at a 4.4% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s better to think of this as a rough estimate that isn’t accurate to the last cent.

The assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. 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 are considering Powermatic Data Systems 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 have used 6.3% which is based on a leveraged beta of 0.924. 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 Powermatic Data Systems

Strength

weakness

Opportunity

Danger

Next Steps:

Valuation is only one side of the coin when building your investment thesis and just one of many factors you need to evaluate for a company. The DCF model is not a perfect stock valuation tool. It should be viewed more as a guide to “what assumptions need to be true for this stock to be under/overvalued.” For example, making a small adjustment to the terminal value growth rate can dramatically change the overall result. For Powermatic Data Systems, we have put together three fundamental points for you to examine:

1. Risks: Take risks, for example – Powermatic Data Systems has 5 warning signs (and 1 that is concerning) that we think you should know about.

2. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea 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. The Simply Wall St app runs a discounted cash flow valuation for every stock on the SGX every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of 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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