Calculating The Fair Value Of Focus Dynamics Group Berhad (KLSE:FOCUS)

Key Insights

• Focus Dynamics Group Berhad's estimated fair value is RM0.02 based on 2 Stage Free Cash Flow to Equity
• Focus Dynamics Group Berhad's RM0.02 share price indicates it is trading at similar levels as its fair value estimate
• Industry average discount to fair value of 21% suggests Focus Dynamics Group Berhad's peers are currently trading at a higher discount

Does the September share price for Focus Dynamics Group Berhad (KLSE:FOCUS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Focus Dynamics Group 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 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM10.3m	RM10.6m	RM10.9m	RM11.2m	RM11.6m	RM12.0m	RM12.4m	RM12.8m	RM13.2m	RM13.7m
Growth Rate Estimate Source	Est @ 2.38%	Est @ 2.73%	Est @ 2.98%	Est @ 3.15%	Est @ 3.27%	Est @ 3.35%	Est @ 3.41%	Est @ 3.45%	Est @ 3.48%	Est @ 3.50%
Present Value (MYR, Millions) Discounted @ 11%	RM9.2	RM8.5	RM7.9	RM7.3	RM6.8	RM6.3	RM5.9	RM5.4	RM5.1	RM4.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM67m

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 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM14m× (1 + 3.6%) ÷ (11%– 3.6%) = RM183m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM183m÷ ( 1 + 11%)¹⁰= RM63m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM130m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.02, the company appears about fair value at a 2.0% 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

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 Focus Dynamics 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 11%, which is based on a levered beta of 1.135. 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.

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. 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Focus Dynamics Group Berhad, we've put together three essential aspects you should consider:

1. Risks: To that end, you should learn about the 3 warning signs we've spotted with Focus Dynamics Group Berhad (including 2 which are a bit unpleasant) .
2. 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!
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. 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.

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.