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Bumi Armada Berhad (KLSE:ARMADA) Shares Could Be 28% Below Their Intrinsic Value Estimate
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Bumi Armada Berhad fair value estimate is RM0.64
- Bumi Armada Berhad is estimated to be 28% undervalued based on current share price of RM0.46
- The RM0.68 analyst price target for ARMADA is 6.4% more than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Bumi Armada Berhad (KLSE:ARMADA) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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 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.
See our latest analysis for Bumi Armada Berhad
Step By Step Through 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 begin with, we have to get estimates of 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.
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) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (MYR, Millions) | RM790.4m | RM571.6m | RM504.0m | RM467.7m | RM449.1m | RM441.3m | RM440.7m | RM445.0m | RM452.7m | RM463.1m |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Est @ -11.82% | Est @ -7.21% | Est @ -3.98% | Est @ -1.72% | Est @ -0.14% | Est @ 0.97% | Est @ 1.74% | Est @ 2.28% |
Present Value (MYR, Millions) Discounted @ 15% | RM689 | RM434 | RM334 | RM270 | RM226 | RM194 | RM169 | RM148 | RM132 | RM117 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM2.7b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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)= FCF2034 × (1 + g) ÷ (r – g) = RM463m× (1 + 3.6%) ÷ (15%– 3.6%) = RM4.3b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM4.3b÷ ( 1 + 15%)10= RM1.1b
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 RM3.8b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of RM0.5, the company appears a touch undervalued at a 28% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
Now 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 Bumi Armada 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 2.000. 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 Bumi Armada Berhad
- Debt is well covered by earnings.
- Earnings declined over the past year.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Annual earnings are forecast to grow slower than the Malaysian market.
Moving On:
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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. Can we work out why the company is trading at a discount to intrinsic value? For Bumi Armada Berhad, there are three pertinent factors you should assess:
- Risks: For example, we've discovered 3 warning signs for Bumi Armada Berhad (1 is a bit unpleasant!) that you should be aware of before investing here.
- Future Earnings: How does ARMADA'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 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. 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.
Valuation is complex, but we're here to simplify it.
Discover if Bumi Armada Berhad might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
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About KLSE:ARMADA
Bumi Armada Berhad
An investment holding company, provides marine transportation, floating production storage offloading (FPSO) operations, and engineering and maintenance services to offshore oil and gas companies.