Estimating The Fair Value Of Aneka Jaringan Holdings Berhad (KLSE:ANEKA)

Key Insights

• Aneka Jaringan Holdings Berhad's estimated fair value is RM0.19 based on 2 Stage Free Cash Flow to Equity
• Current share price of RM0.17 suggests Aneka Jaringan Holdings Berhad is potentially trading close to its fair value
• Aneka Jaringan Holdings Berhad's peers are currently trading at a premium of 247% on average

Today we will run through one way of estimating the intrinsic value of Aneka Jaringan Holdings Berhad (KLSE:ANEKA) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

Check out our latest analysis for Aneka Jaringan Holdings Berhad

Step By Step Through The Calculation

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 start off with, we need to estimate 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM3.62m	RM5.47m	RM7.48m	RM9.48m	RM11.4m	RM13.1m	RM14.6m	RM15.9m	RM17.1m	RM18.2m
Growth Rate Estimate Source	Est @ 71.29%	Est @ 50.97%	Est @ 36.74%	Est @ 26.78%	Est @ 19.81%	Est @ 14.93%	Est @ 11.52%	Est @ 9.13%	Est @ 7.45%	Est @ 6.28%
Present Value (MYR, Millions) Discounted @ 12%	RM3.2	RM4.3	RM5.3	RM6.0	RM6.3	RM6.5	RM6.4	RM6.3	RM6.0	RM5.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM56m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (3.6%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM18m× (1 + 3.6%) ÷ (12%– 3.6%) = RM214m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM214m÷ ( 1 + 12%)¹⁰= RM67m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM123m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.2, the company appears about fair value at a 6.9% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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 Aneka Jaringan Holdings 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 12%, which is based on a levered beta of 1.290. 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 Aneka Jaringan Holdings Berhad

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Aneka Jaringan Holdings Berhad, we've compiled three fundamental aspects you should further examine:

1. Risks: Take risks, for example - Aneka Jaringan Holdings Berhad has 4 warning signs (and 1 which is significant) 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 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.