Yoong Onn Corporation Berhad (KLSE:YOCB) Intrinsic Value Calculation
Today, we are going to walk through a way to estimate the intrinsic value of Yoong Onn Corporation Berhad (KLSE:YOCB) by estimating the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Check out our latest analysis for Yoong Onn Corporation Berhad
Does Yoong Onn Corporation Berhad have a fair value?
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. In the first step, we need to estimate the company’s cash flow over the next ten years. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:
10-Year Free Cash Flow (FCF) Forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (MYR, Millions) | RM24.0m | RM19.8m | RM17.6m | RM16.5m | RM15.9 million | RM15.7 million | RM15.7 million | RM15.8 million | RM16.1m | RM16.5m |
Growth rate estimate Source | Is @ -26.13% | East @ -17.22% | East @ -10.99% | Is @ -6.63% | Is @ -3.58% | Is @ -1.44% | Is at 0.06% | Is at 1.11% | Is at 1.84% | Is at 2.35% |
Present Value (MYR, millions) discounted at 9.0% | RM22.0 | RM16.7 | RM13.6 | RM11.7 | RM10.3 | RM9.3 | RM8.6 | RM7.9 | RM7.4 | RM7.0 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = RM114m
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (3.6%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 9.0%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = RM17m × (1 + 3.6%) ÷ (9.0%– 3.6%) = RM313m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= RM313m÷ ( 1 + 9.0%)^{ten}= RM132m
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is RM246 million. In the last step, we divide the equity value by the number of shares outstanding. Based on the current share price of RM1.3, the company appears to be approximately fair value at a 15% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.
Important assumptions
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 assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Yoong Onn Corporation 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 takes debt into account. In this calculation, we used 9.0%, which is based on a leveraged beta of 1.007. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Look forward:
Although important, the DCF calculation is just one of many factors you need to assess for a business. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. For Yoong Onn Corporation Berhad, there are three essential elements that you must evaluate:
- Risks: You should be aware of the 2 warning signs for Yoong Onn Corporation Berhad we found out before considering an investment in the business.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
- Other environmentally friendly businesses: Are you concerned about the environment and do you think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover actions you might not have thought of!
PS. The Simply Wall St app performs an updated cash flow valuation for each stock on the KLSE every day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
Calculation of discounted cash flows for each share
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