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A Look At The Fair Value Of Federal International Holdings Berhad (KLSE:FIHB)

Key Insights

  • The projected fair value for Federal International Holdings Berhad is RM0.44 based on 2 Stage Free Cash Flow to Equity

  • Federal International Holdings Berhad's RM0.51 share price indicates it is trading at similar levels as its fair value estimate

  • When compared to theindustry average discount of -109%, Federal International Holdings Berhad's competitors seem to be trading at a greater premium to fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Federal International Holdings Berhad (KLSE:FIHB) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Federal International Holdings Berhad

What's The Estimated Valuation?

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. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (MYR, Millions)

RM2.99m

RM3.89m

RM4.76m

RM5.56m

RM6.26m

RM6.89m

RM7.44m

RM7.94m

RM8.40m

RM8.83m

Growth Rate Estimate Source

Est @ 41.80%

Est @ 30.33%

Est @ 22.29%

Est @ 16.67%

Est @ 12.73%

Est @ 9.98%

Est @ 8.05%

Est @ 6.70%

Est @ 5.76%

Est @ 5.09%

Present Value (MYR, Millions) Discounted @ 13%

RM2.7

RM3.1

RM3.3

RM3.4

RM3.4

RM3.4

RM3.2

RM3.0

RM2.9

RM2.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM31m

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 (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 13%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = RM8.8m× (1 + 3.6%) ÷ (13%– 3.6%) = RM99m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM99m÷ ( 1 + 13%)10= RM30m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM61m. To get the intrinsic value per share, we divide this by the total 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.

dcf
dcf

The Assumptions

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 Federal International Holdings 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 13%, which is based on a levered beta of 1.350. 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.

SWOT Analysis for Federal International Holdings Berhad

Strength

  • Net debt to equity ratio below 40%.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Earnings declined over the past year.

  • Interest payments on debt are not well covered.

  • Dividend is low compared to the top 25% of dividend payers in the Consumer Durables market.

  • Current share price is above our estimate of fair value.

Opportunity

  • FIHB's financial characteristics indicate limited near-term opportunities for shareholders.

  • Lack of analyst coverage makes it difficult to determine FIHB's earnings prospects.

Threat

  • Debt is not well covered by operating cash flow.

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Federal International Holdings Berhad, we've put together three fundamental aspects you should assess:

  1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with Federal International Holdings Berhad .

  2. 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!

  3. 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 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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