A Look At The Intrinsic Value Of K-One Technology Berhad (KLSE:K1)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, K-One Technology Berhad fair value estimate is RM0.18
• Current share price of RM0.15 suggests K-One Technology Berhad is potentially trading close to its fair value
• K-One Technology Berhad's peers are currently trading at a premium of 856% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of K-One Technology Berhad (KLSE:K1) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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 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 K-One Technology Berhad

What's The Estimated Valuation?

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.

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)	RM7.11m	RM8.48m	RM9.73m	RM10.8m	RM11.8m	RM12.7m	RM13.5m	RM14.2m	RM14.9m	RM15.5m
Growth Rate Estimate Source	Est @ 26.20%	Est @ 19.40%	Est @ 14.65%	Est @ 11.32%	Est @ 8.99%	Est @ 7.36%	Est @ 6.21%	Est @ 5.41%	Est @ 4.86%	Est @ 4.46%
Present Value (MYR, Millions) Discounted @ 11%	RM6.4	RM6.9	RM7.2	RM7.2	RM7.1	RM6.9	RM6.6	RM6.3	RM5.9	RM5.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM66m

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. 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) = RM16m× (1 + 3.6%) ÷ (11%– 3.6%) = RM224m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM224m÷ ( 1 + 11%)¹⁰= RM81m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM147m. 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 about fair value at a 15% 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

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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 K-One Technology 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 1.053. 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:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 K-One Technology Berhad, we've put together three relevant items you should further examine:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with K-One Technology Berhad .
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 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.