Estimating the fair value of Seng Fong Holdings Berhad (KLSE:SENFONG)

Does Seng Fong Holdings Berhad’s (KLSE:SENFONG) share price in November reflect its true value? Today we will estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. Models like these may seem incomprehensible to a layperson, but they are relatively easy to follow.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. If you still have pressing questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Seng Fong Holdings Berhad

What is the estimated value?

Because Seng Fong Holdings Berhad operates in the chemicals sector, we need to calculate intrinsic value a little differently. Rather than using free cash flows, which are difficult to estimate and often unreported by analysts in this industry, it uses dividend payments per share (DPS). This often underestimates a stock’s value, but can still be good as a comparison to competitors. It uses the ‘Gordon Growth Model’, which simply assumes that dividend payments will continue to grow at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year government bond yield of 3.6%. We then discount this figure to today’s value at a cost of equity of 10%. Compared to the current share price of RM0.6, the company appears to be about fair value at the time of writing. However, remember that this is only an approximate assessment and as with any complex formula, where garbage goes in, garbage comes out.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= 0.04 RM / (10% – 3.6%)

= 0.6 RM

Important assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with it. DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we are considering Seng Fong Holdings Berhad as prospective 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 10% which is based on a leveraged beta of 1.055. 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.

Next Steps:

Valuation is only one side of the coin when building your investment thesis and ideally shouldn’t be the only analysis you look at for a company. DCF models are not the be-all and end-all of investment valuation. 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. If a company grows differently, or its cost of equity or risk-free rate changes significantly, the outcome could be very different. For Seng Fong Holdings Berhad, we’ve compiled three relevant factors for you to consider:

1. Risks: Every company has them, and we have found 4 warning signs for Seng Fong Holdings Berhad (2 of which are worrying!) that you should know about.

2. Future income: How does SENFONG’s growth rate compare to its competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.

3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

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.

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment 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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