A Look At The Intrinsic Value Of TMK Chemical Bhd (KLSE:TMK)
TMK Chemical Bhd's estimated fair value is RM1.38 based on 2 Stage Free Cash Flow to Equity
Current share price of RM1.21 suggests TMK Chemical Bhd is potentially trading close to its fair value
The RM2.04 analyst price target for TMK is 48% more than our estimate of fair value
In this article we are going to estimate the intrinsic value of TMK Chemical Bhd (KLSE:TMK) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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'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, 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 (MYR, Millions)
RM82.3m
RM86.1m
RM89.7m
RM93.4m
RM97.1m
RM100.8m
RM104.6m
RM108.5m
RM112.6m
RM116.7m
Growth Rate Estimate Source
Est @ 4.90%
Est @ 4.52%
Est @ 4.26%
Est @ 4.07%
Est @ 3.94%
Est @ 3.85%
Est @ 3.79%
Est @ 3.74%
Est @ 3.71%
Est @ 3.69%
Present Value (MYR, Millions) Discounted @ 9.7%
RM75.0
RM71.5
RM67.9
RM64.4
RM61.0
RM57.7
RM54.6
RM51.6
RM48.8
RM46.1
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM599m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (3.6%) 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 9.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM117m× (1 + 3.6%) ÷ (9.7%– 3.6%) = RM2.0b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM2.0b÷ ( 1 + 9.7%)10= RM784m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM1.4b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM1.2, the company appears about fair value at a 12% 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.
Now 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 TMK Chemical Bhd 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 9.7%, which is based on a levered beta of 1.028. 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 TMK Chemical Bhd
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Chemicals market.
Opportunity
Annual revenue is forecast to grow faster than the Malaysian market.
Current share price is below our estimate of fair value.
Threat
Annual earnings are forecast to grow slower than the Malaysian market.
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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 TMK Chemical Bhd, there are three further aspects you should look at:
Financial Health: Does TMK have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does TMK'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.
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!
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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Investing narratives with Fair Values
A case for TSXV:USA to reach USD $5.00 - $9.00 (CAD $7.30–$12.29) by 2029. By Agricola – Community Contributor
Fair Value Estimated: CA$12.29 · 0.9% Overvalued
DLocal's Future Growth Fueled by 35% Revenue and Profit Margin Boosts By WynnLevi – Community Contributor
Fair Value Estimated: $195.39 · 0.9% Overvalued
Historically Cheap, but the Margin of Safety Is Still Thin By Mandelman – Community Contributor
Fair Value Estimated: SEK232.58 · 0.2% Overvalued
View more featured narratives
—
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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