- Energy Services
A Look At The Fair Value Of AMOS Group Limited (SGX:49B)
- The projected fair value for AMOS Group is S$0.11 based on 2 Stage Free Cash Flow to Equity
- With S$0.11 share price, AMOS Group appears to be trading close to its estimated fair value
- Peers of AMOS Group are currently trading on average at a 25% premium
Today we will run through one way of estimating the intrinsic value of AMOS Group Limited (SGX:49B) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
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.
See our latest analysis for AMOS Group
Crunching The Numbers
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
|Levered FCF (SGD, Millions)||S$954.1k||S$1.43m||S$1.93m||S$2.42m||S$2.86m||S$3.24m||S$3.56m||S$3.83m||S$4.05m||S$4.24m|
|Growth Rate Estimate Source||Est @ 69.92%||Est @ 49.52%||Est @ 35.24%||Est @ 25.25%||Est @ 18.25%||Est @ 13.36%||Est @ 9.93%||Est @ 7.53%||Est @ 5.85%||Est @ 4.67%|
|Present Value (SGD, Millions) Discounted @ 14%||S$0.8||S$1.1||S$1.3||S$1.4||S$1.5||S$1.5||S$1.4||S$1.4||S$1.3||S$1.2|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = S$13m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 (1.9%) 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 14%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = S$4.2m× (1 + 1.9%) ÷ (14%– 1.9%) = S$36m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$36m÷ ( 1 + 14%)10= S$10.0m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$23m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.1, the company appears about fair value at a 0.8% 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.
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 AMOS Group 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 14%, 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 AMOS Group
- Net debt to equity ratio below 40%.
- Shareholders have been diluted in the past year.
- Has sufficient cash runway for more than 3 years based on current free cash flows.
- Current share price is below our estimate of fair value.
- Lack of analyst coverage makes it difficult to determine 49B's earnings prospects.
- Debt is not well covered by operating cash flow.
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize 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. 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 AMOS Group, there are three additional elements you should look at:
- Risks: Be aware that AMOS Group is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
- 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!
- 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 Singaporean 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.
AMOS Group Limited, an investment holding company, manufactures and supplies rigging and lifting equipment for offshore oil and gas, and marine industries worldwide.
Flawless balance sheet and slightly overvalued.