Estimating The Intrinsic Value Of MClean Technologies Berhad (KLSE:MCLEAN)

Key Insights

• The projected fair value for MClean Technologies Berhad is RM0.14 based on 2 Stage Free Cash Flow to Equity
• Current share price of RM0.14 suggests MClean Technologies Berhad is potentially trading close to its fair value
• Industry average of 144% suggests MClean Technologies Berhad's peers are currently trading at a higher premium to fair value

Does the March share price for MClean Technologies Berhad (KLSE:MCLEAN) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for MClean Technologies Berhad

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM1.55m	RM1.53m	RM1.52m	RM1.53m	RM1.56m	RM1.60m	RM1.64m	RM1.68m	RM1.74m	RM1.79m
Growth Rate Estimate Source	Est @ -4.22%	Est @ -1.89%	Est @ -0.26%	Est @ 0.88%	Est @ 1.68%	Est @ 2.24%	Est @ 2.63%	Est @ 2.90%	Est @ 3.09%	Est @ 3.23%
Present Value (MYR, Millions) Discounted @ 8.4%	RM1.4	RM1.3	RM1.2	RM1.1	RM1.0	RM1.0	RM0.9	RM0.9	RM0.8	RM0.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM11m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 3.5%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM1.8m× (1 + 3.5%) ÷ (8.4%– 3.5%) = RM38m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM38m÷ ( 1 + 8.4%)¹⁰= RM17m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM28m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM0.1, the company appears around fair value at the time of writing. 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 MClean Technologies 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 8.4%, which is based on a levered beta of 1.058. 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 MClean Technologies Berhad

Next Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 MClean Technologies Berhad, we've put together three further aspects you should look at:

1. Risks: Take risks, for example - MClean Technologies Berhad has 3 warning signs (and 2 which are a bit unpleasant) 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 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. 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.