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Cypark Resources Berhad's (KLSE:CYPARK) Intrinsic Value Is Potentially 42% Above Its Share Price
Key Insights
- Cypark Resources Berhad's estimated fair value is RM1.43 based on 2 Stage Free Cash Flow to Equity
- Cypark Resources Berhad is estimated to be 30% undervalued based on current share price of RM1.01
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Cypark Resources Berhad (KLSE:CYPARK) as an investment opportunity 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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.
View our latest analysis for Cypark Resources Berhad
Crunching The Numbers
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. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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) | RM77.5m | RM167.6m | RM159.9m | RM156.8m | RM156.3m | RM157.6m | RM160.2m | RM163.8m | RM168.1m | RM172.9m |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Analyst x1 | Est @ -1.97% | Est @ -0.31% | Est @ 0.85% | Est @ 1.66% | Est @ 2.23% | Est @ 2.62% | Est @ 2.90% |
Present Value (MYR, Millions) Discounted @ 15% | RM67.5 | RM127 | RM106 | RM90.3 | RM78.4 | RM68.9 | RM61.0 | RM54.3 | RM48.6 | RM43.5 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM745m
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 15%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = RM173m× (1 + 3.6%) ÷ (15%– 3.6%) = RM1.6b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM1.6b÷ ( 1 + 15%)10= RM401m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is RM1.1b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of RM1.0, the company appears a touch undervalued at a 30% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
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. 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 Cypark Resources 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 15%, which is based on a levered beta of 1.649. 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 Cypark Resources Berhad
- No major strengths identified for CYPARK.
- Shareholders have been diluted in the past year.
- Expected to breakeven next year.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Trading below our estimate of fair value by more than 20%.
- Debt is not well covered by operating cash flow.
Moving On:
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. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Cypark Resources Berhad, we've put together three relevant aspects you should further examine:
- Risks: Be aware that Cypark Resources Berhad is showing 3 warning signs in our investment analysis , and 1 of those is concerning...
- Future Earnings: How does CYPARK'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.
- 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!
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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About KLSE:CYPARK
Cypark Resources Berhad
Engages in the renewable energy, construction, engineering, green technology, environment, waste management, and waste-to-energy (WTE) businesses in Malaysia.
High growth potential with worrying balance sheet.