Calculating The Fair Value Of ECM Libra Group Berhad (KLSE:ECM)

Key Insights

• The projected fair value for ECM Libra Group Berhad is RM0.23 based on 2 Stage Free Cash Flow to Equity
• ECM Libra Group Berhad's RM0.22 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount to fair value of 19%, ECM Libra Group Berhad's competitors seem to be trading at a greater discount

Today we will run through one way of estimating the intrinsic value of ECM Libra Group Berhad (KLSE:ECM) by estimating the company's future cash flows and discounting them to their present 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.

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for ECM Libra Group 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. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM6.06m	RM7.42m	RM8.68m	RM9.80m	RM10.8m	RM11.7m	RM12.4m	RM13.2m	RM13.8m	RM14.5m
Growth Rate Estimate Source	Est @ 30.76%	Est @ 22.60%	Est @ 16.88%	Est @ 12.88%	Est @ 10.08%	Est @ 8.12%	Est @ 6.75%	Est @ 5.79%	Est @ 5.12%	Est @ 4.65%
Present Value (MYR, Millions) Discounted @ 12%	RM5.4	RM5.9	RM6.2	RM6.2	RM6.1	RM5.9	RM5.6	RM5.3	RM5.0	RM4.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM56m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 12%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM14m× (1 + 3.6%) ÷ (12%– 3.6%) = RM176m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM176m÷ ( 1 + 12%)¹⁰= RM56m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM112m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.2, the company appears about fair value at a 6.1% 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. 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 ECM Libra Group 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 12%, which is based on a levered beta of 1.250. 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 ECM Libra Group 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. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For ECM Libra Group Berhad, we've compiled three further elements you should assess:

1. Risks: Be aware that ECM Libra Group Berhad is showing 2 warning signs in our investment analysis , 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. 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.