Calculating The Fair Value Of Charisma Energy Services Limited (Catalist:YSV)

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5 hours ago

Charisma Energy Services' estimated fair value is S$0.052 based on 2 Stage Free Cash Flow to Equity
With S$0.051 share price, Charisma Energy Services appears to be trading close to its estimated fair value
The average premium for Charisma Energy Services' competitorsis currently 346%
In this article we are going to estimate the intrinsic value of Charisma Energy Services Limited (Catalist:YSV) by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
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We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$2.28m
US$1.56m
US$1.23m
US$1.05m
US$956.0k
US$900.8k
US$870.8k
US$856.7k
US$853.0k
US$856.5k
Growth Rate Estimate Source
Est @ -46.00%
Est @ -31.49%
Est @ -21.34%
Est @ -14.23%
Est @ -9.25%
Est @ -5.77%
Est @ -3.33%
Est @ -1.62%
Est @ -0.43%
Est @ 0.41%
Present Value ($, Millions) Discounted @ 11%
US$2.1
US$1.3
US$0.9
US$0.7
US$0.6
US$0.5
US$0.4
US$0.4
US$0.3
US$0.3
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$7.4m
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 (2.4%) 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 11%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$857k× (1 + 2.4%) ÷ (11%– 2.4%) = US$10m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$10m÷ ( 1 + 11%)10= US$3.6m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$11m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of S$0.05, the company appears about fair value at a 1.2% 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.
Now 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 Charisma Energy Services 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 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.
See our latest analysis for Charisma Energy Services
Strength
No major strengths identified for YSV.
Weakness
Interest payments on debt are not well covered.
Opportunity
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 YSV's earnings prospects.
Threat
Debt is not well covered by operating cash flow.
Total liabilities exceed total assets, which raises the risk of financial distress.
Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Charisma Energy Services, we've put together three pertinent aspects you should consider:
Risks: We feel that you should assess the 3 warning signs for Charisma Energy Services (2 make us uncomfortable!) we've flagged before making an investment in the company.
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!
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 CATALIST every day. If you want to find the calculation for other stocks just search here.
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