Estimating The Intrinsic Value Of Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Kumpulan H & L High-Tech Berhad fair value estimate is RM1.09

• Kumpulan H & L High-Tech Berhad's RM0.88 share price indicates it is trading at similar levels as its fair value estimate

• The average premium for Kumpulan H & L High-Tech Berhad's competitorsis currently 138%

How far off is Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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

The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (MYR, Millions)	RM8.06m	RM8.72m	RM9.32m	RM9.86m	RM10.4m	RM10.9m	RM11.3m	RM11.8m	RM12.2m	RM12.7m
Growth Rate Estimate Source	Est @ 10.19%	Est @ 8.20%	Est @ 6.80%	Est @ 5.83%	Est @ 5.14%	Est @ 4.67%	Est @ 4.33%	Est @ 4.10%	Est @ 3.93%	Est @ 3.82%
Present Value (MYR, Millions) Discounted @ 11%	RM7.3	RM7.1	RM6.9	RM6.6	RM6.3	RM5.9	RM5.6	RM5.3	RM4.9	RM4.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM61m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.6%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal 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= RM186m÷ ( 1 + 11%)¹⁰= RM68m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM129m. 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 about fair value at a 20% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf

The Assumptions

We would point out that the most important 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 redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at 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 accounts for debt. In this calculation we've used 11%, which is based on a levered beta of 1.112. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Kumpulan H & L High-Tech Berhad

Strength

• Earnings growth over the past year exceeded the industry.

• Debt is not viewed as a risk.

• Dividends are covered by earnings and cash flows.

Weakness

• Earnings growth over the past year is below its 5-year average.

• Dividend is low compared to the top 25% of dividend payers in the Machinery market.

Opportunity

• Current share price is below our estimate of fair value.

• Lack of analyst coverage makes it difficult to determine HIGHTEC's earnings prospects.

Threat

• No apparent threats visible for HIGHTEC.

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Kumpulan H & L High-Tech Berhad, we've compiled three fundamental elements you should further examine:

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

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 is out there you may be missing!

3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com