A Look At The Fair Value Of GFM Services Berhad (KLSE:GFM)
Key Insights
GFM Services Berhad's estimated fair value is RM0.21 based on 2 Stage Free Cash Flow to Equity
GFM Services Berhad's RM0.20 share price indicates it is trading at similar levels as its fair value estimate
GFM Services Berhad's peers are currently trading at a premium of 11,888% on average
Today we will run through one way of estimating the intrinsic value of GFM Services Berhad (KLSE:GFM) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for GFM Services Berhad
What's The Estimated Valuation?
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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (MYR, Millions) | RM22.0m | RM21.9m | RM22.1m | RM22.5m | RM23.0m | RM23.6m | RM24.3m | RM25.1m | RM25.9m | RM26.7m |
Growth Rate Estimate Source | Est @ -1.86% | Est @ -0.23% | Est @ 0.91% | Est @ 1.71% | Est @ 2.27% | Est @ 2.66% | Est @ 2.93% | Est @ 3.12% | Est @ 3.26% | Est @ 3.35% |
Present Value (MYR, Millions) Discounted @ 18% | RM18.7 | RM15.8 | RM13.6 | RM11.7 | RM10.2 | RM8.9 | RM7.8 | RM6.8 | RM6.0 | RM5.2 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM104m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 18%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = RM27m× (1 + 3.6%) ÷ (18%– 3.6%) = RM196m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM196m÷ ( 1 + 18%)10= RM38m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM143m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of RM0.2, the company appears about fair value at a 5.7% 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.
The Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 GFM Services 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 18%, which is based on a levered beta of 1.766. 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 GFM Services Berhad
Strength
Earnings growth over the past year exceeded the industry.
Weakness
Interest payments on debt are not well covered.
Dividend is low compared to the top 25% of dividend payers in the Commercial Services market.
Shareholders have been diluted in the past year.
Opportunity
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine GFM'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. The DCF model is not a perfect stock valuation tool. 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 GFM Services Berhad, we've put together three further items you should explore:
Risks: Take risks, for example - GFM Services Berhad has 4 warning signs (and 2 which make us uncomfortable) we think 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 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. 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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