Calculating The Intrinsic Value Of FITTERS Diversified Berhad (KLSE:FITTERS)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, FITTERS Diversified Berhad fair value estimate is RM0.05
• FITTERS Diversified Berhad's RM0.05 share price indicates it is trading at similar levels as its fair value estimate
• The average premium for FITTERS Diversified Berhad's competitorsis currently 249%

Does the May share price for FITTERS Diversified Berhad (KLSE:FITTERS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for FITTERS Diversified Berhad

Step By Step Through The Calculation

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 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.

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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (MYR, Millions)	RM10.3m	RM11.1m	RM11.9m	RM12.6m	RM13.3m	RM13.9m	RM14.5m	RM15.1m	RM15.7m	RM16.3m
Growth Rate Estimate Source	Est @ 10.45%	Est @ 8.39%	Est @ 6.94%	Est @ 5.93%	Est @ 5.22%	Est @ 4.73%	Est @ 4.38%	Est @ 4.14%	Est @ 3.97%	Est @ 3.85%
Present Value (MYR, Millions) Discounted @ 13%	RM9.1	RM8.7	RM8.2	RM7.6	RM7.1	RM6.6	RM6.0	RM5.5	RM5.1	RM4.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM69m

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 13%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = RM16m× (1 + 3.6%) ÷ (13%– 3.6%) = RM173m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM173m÷ ( 1 + 13%)¹⁰= RM49m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM118m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of RM0.05, the company appears about fair value at a 0.5% 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

Now 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 FITTERS Diversified 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 13%, which is based on a levered beta of 1.223. 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 FITTERS Diversified Berhad

Moving On:

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 FITTERS Diversified Berhad, we've put together three pertinent elements you should look at:

1. Risks: Take risks, for example - FITTERS Diversified Berhad has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KLSE every day. If you want to find the calculation for other stocks 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.