Estimating The Intrinsic Value Of Superlon Holdings Berhad (KLSE:SUPERLN)

Key Insights

• Superlon Holdings Berhad's estimated fair value is RM0.83 based on 2 Stage Free Cash Flow to Equity
• Superlon Holdings Berhad's RM0.71 share price indicates it is trading at similar levels as its fair value estimate
• The average premium for Superlon Holdings Berhad's competitorsis currently 456%

In this article we are going to estimate the intrinsic value of Superlon Holdings Berhad (KLSE:SUPERLN) by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Superlon Holdings Berhad

Is Superlon Holdings Berhad Fairly Valued?

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (MYR, Millions)	RM14.7m	RM14.2m	RM14.1m	RM14.1m	RM14.3m	RM14.6m	RM14.9m	RM15.3m	RM15.8m	RM16.3m
Growth Rate Estimate Source	Est @ -6.00%	Est @ -3.13%	Est @ -1.12%	Est @ 0.29%	Est @ 1.27%	Est @ 1.96%	Est @ 2.44%	Est @ 2.78%	Est @ 3.02%	Est @ 3.18%
Present Value (MYR, Millions) Discounted @ 13%	RM13.0	RM11.1	RM9.7	RM8.6	RM7.7	RM7.0	RM6.3	RM5.8	RM5.2	RM4.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM79m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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%) = RM178m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM178m÷ ( 1 + 13%)¹⁰= RM52m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM132m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM0.7, 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Superlon 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 13%, which is based on a levered beta of 1.182. 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 Superlon Holdings Berhad

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 Superlon Holdings Berhad, we've put together three pertinent items you should assess:

1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Superlon Holdings Berhad , and understanding them should be part of your investment process.
2. Future Earnings: How does SUPERLN'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.