Econpile Holdings Berhad (KLSE:ECONBHD) Shares Could Be 50% Below Their Intrinsic Value Estimate

Key Insights

• Econpile Holdings Berhad's estimated fair value is RM0.56 based on 2 Stage Free Cash Flow to Equity
• Econpile Holdings Berhad is estimated to be 50% undervalued based on current share price of RM0.28
• Our fair value estimate is 283% higher than Econpile Holdings Berhad's analyst price target of RM0.14

In this article we are going to estimate the intrinsic value of Econpile Holdings Berhad (KLSE:ECONBHD) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Econpile Holdings Berhad

The Model

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM27.3m	RM37.3m	RM47.4m	RM56.8m	RM65.3m	RM72.9m	RM79.5m	RM85.5m	RM90.8m	RM95.8m
Growth Rate Estimate Source	Est @ 51.18%	Est @ 36.89%	Est @ 26.89%	Est @ 19.89%	Est @ 14.99%	Est @ 11.56%	Est @ 9.15%	Est @ 7.47%	Est @ 6.30%	Est @ 5.47%
Present Value (MYR, Millions) Discounted @ 11%	RM24.5	RM30.2	RM34.4	RM37.1	RM38.3	RM38.4	RM37.7	RM36.4	RM34.8	RM33.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM345m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM96m× (1 + 3.6%) ÷ (11%– 3.6%) = RM1.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM1.3b÷ ( 1 + 11%)¹⁰= RM443m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM787m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of RM0.3, the company appears quite good value at a 50% 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Econpile 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 11%, which is based on a levered beta of 1.130. 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.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Econpile Holdings Berhad, there are three additional items you should explore:

1. Risks: Be aware that Econpile Holdings Berhad is showing 2 warning signs in our investment analysis , you should know about...
2. Future Earnings: How does ECONBHD's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. 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!

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.