Calculating The Intrinsic Value Of Hwa Tai Industries Berhad (KLSE:HWATAI)
Hwa Tai Industries Berhad's estimated fair value is RM0.48 based on 2 Stage Free Cash Flow to Equity
Hwa Tai Industries Berhad's RM0.51 share price indicates it is trading at similar levels as its fair value estimate
Industry average of 503% suggests Hwa Tai Industries Berhad's peers are currently trading at a higher premium to fair value
In this article we are going to estimate the intrinsic value of Hwa Tai Industries Berhad (KLSE:HWATAI) 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. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
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'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. 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (MYR, Millions)
RM454.8k
RM733.2k
RM1.06m
RM1.39m
RM1.72m
RM2.02m
RM2.29m
RM2.52m
RM2.74m
RM2.93m
Growth Rate Estimate Source
Est @ 85.90%
Est @ 61.22%
Est @ 43.95%
Est @ 31.86%
Est @ 23.39%
Est @ 17.47%
Est @ 13.32%
Est @ 10.41%
Est @ 8.38%
Est @ 6.96%
Present Value (MYR, Millions) Discounted @ 8.7%
RM0.4
RM0.6
RM0.8
RM1.0
RM1.1
RM1.2
RM1.3
RM1.3
RM1.3
RM1.3
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM10m
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 8.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM2.9m× (1 + 3.6%) ÷ (8.7%– 3.6%) = RM59m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM59m÷ ( 1 + 8.7%)10= RM26m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM36m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of RM0.5, the company appears around fair value at the time of writing. 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. 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 Hwa Tai Industries 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 8.7%, which is based on a levered beta of 0.861. 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 Hwa Tai Industries Berhad
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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 Hwa Tai Industries Berhad, there are three additional items you should look at:
Risks: Be aware that Hwa Tai Industries Berhad is showing 2 warning signs in our investment analysis , you should know about...
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 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 Malaysian stock every day, so if you want to find the intrinsic value of any other stock 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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