Calculating The Fair Value Of BTM Resources Berhad (KLSE:BTM)
The projected fair value for BTM Resources Berhad is RM0.041 based on 2 Stage Free Cash Flow to Equity
BTM Resources Berhad's RM0.04 share price indicates it is trading at similar levels as its fair value estimate
BTM Resources Berhad's peers are currently trading at a premium of 113% on average
In this article we are going to estimate the intrinsic value of BTM Resources Berhad (KLSE:BTM) by projecting its future cash flows and then discounting them 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!
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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
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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. 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, and so the sum of these future cash flows is then discounted to today's value:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (MYR, Millions)
RM3.23m
RM3.55m
RM3.85m
RM4.11m
RM4.35m
RM4.58m
RM4.79m
RM5.01m
RM5.21m
RM5.42m
Growth Rate Estimate Source
Est @ 12.97%
Est @ 10.17%
Est @ 8.21%
Est @ 6.84%
Est @ 5.88%
Est @ 5.21%
Est @ 4.74%
Est @ 4.41%
Est @ 4.18%
Est @ 4.02%
Present Value (MYR, Millions) Discounted @ 11%
RM2.9
RM2.9
RM2.8
RM2.7
RM2.6
RM2.5
RM2.3
RM2.2
RM2.0
RM1.9
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM25m
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)= FCF2034 × (1 + g) ÷ (r – g) = RM5.4m× (1 + 3.6%) ÷ (11%– 3.6%) = RM77m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM77m÷ ( 1 + 11%)10= RM27m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM52m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.04, the company appears about fair value at a 3.1% 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.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 BTM Resources 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 1.236. 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 BTM Resources Berhad
Whilst important, the DCF calculation 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. 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 BTM Resources Berhad, we've compiled three fundamental factors you should consider:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with BTM Resources Berhad (at least 3 which can't be ignored) , and understanding these should be part of your investment process.
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. 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.
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