Estimating The Fair Value Of FITTERS Diversified Berhad (KLSE:FITTERS)

Key Insights

• FITTERS Diversified Berhad's estimated fair value is RM0.058 based on 2 Stage Free Cash Flow to Equity
• 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 92%

How far off is FITTERS Diversified Berhad (KLSE:FITTERS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for FITTERS Diversified Berhad

The Method

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM18.2m	RM15.1m	RM13.5m	RM12.7m	RM12.3m	RM12.1m	RM12.1m	RM12.3m	RM12.5m	RM12.8m
Growth Rate Estimate Source	Est @ -25.32%	Est @ -16.66%	Est @ -10.60%	Est @ -6.35%	Est @ -3.38%	Est @ -1.30%	Est @ 0.15%	Est @ 1.17%	Est @ 1.89%	Est @ 2.39%
Present Value (MYR, Millions) Discounted @ 11%	RM16.3	RM12.2	RM9.8	RM8.2	RM7.1	RM6.3	RM5.7	RM5.1	RM4.7	RM4.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM80m

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) = RM13m× (1 + 3.6%) ÷ (11%– 3.6%) = RM167m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM167m÷ ( 1 + 11%)¹⁰= RM57m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM136m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM0.05, the company appears about fair value at a 14% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

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 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 11%, which is based on a levered beta of 1.159. 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

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For FITTERS Diversified Berhad, there are three relevant items you should look at:

1. Risks: Be aware that FITTERS Diversified Berhad is showing 4 warning signs in our investment analysis , and 3 of those are a bit concerning...
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 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.