Estimating The Intrinsic Value Of Seni Jaya Corporation Berhad (KLSE:SJC)

Key Insights

• The projected fair value for Seni Jaya Corporation Berhad is RM0.59 based on 2 Stage Free Cash Flow to Equity
• With RM0.48 share price, Seni Jaya Corporation Berhad appears to be trading close to its estimated fair value
• Seni Jaya Corporation Berhad's peers seem to be trading at a higher discount to fair value based onthe industry average of 71%

Today we will run through one way of estimating the intrinsic value of Seni Jaya Corporation Berhad (KLSE:SJC) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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The Method

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.

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) forecast

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (MYR, Millions)	RM2.53m	RM3.60m	RM4.71m	RM5.77m	RM6.74m	RM7.62m	RM8.39m	RM9.08m	RM9.70m	RM10.3m
Growth Rate Estimate Source	Est @ 58.81%	Est @ 42.27%	Est @ 30.69%	Est @ 22.58%	Est @ 16.91%	Est @ 12.94%	Est @ 10.16%	Est @ 8.21%	Est @ 6.85%	Est @ 5.90%
Present Value (MYR, Millions) Discounted @ 8.9%	RM2.3	RM3.0	RM3.6	RM4.1	RM4.4	RM4.6	RM4.6	RM4.6	RM4.5	RM4.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM40m

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 3.7%. We discount the terminal cash flows to today's value at a cost of equity of 8.9%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = RM10m× (1 + 3.7%) ÷ (8.9%– 3.7%) = RM202m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM202m÷ ( 1 + 8.9%)¹⁰= RM86m

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 RM126m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM0.5, the company appears about fair value at a 18% 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. 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 Seni Jaya Corporation 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 8.9%, which is based on a levered beta of 0.882. 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.

View our latest analysis for Seni Jaya Corporation Berhad

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. The DCF model is not a perfect stock valuation tool. 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. For Seni Jaya Corporation Berhad, there are three important aspects you should explore:

1. Risks: Take risks, for example - Seni Jaya Corporation Berhad has 1 warning sign we think you should be aware of.
2. Future Earnings: How does SJC'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.
3. 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. 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.