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Yahoo
22-06-2025
- Business
- Yahoo
A Look At The Intrinsic Value Of Spectral AI, Inc. (NASDAQ:MDAI)
Using the 2 Stage Free Cash Flow to Equity, Spectral AI fair value estimate is US$2.30 Current share price of US$2.19 suggests Spectral AI is potentially trading close to its fair value Our fair value estimate is 52% lower than Spectral AI's analyst price target of US$4.79 Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Spectral AI, Inc. (NASDAQ:MDAI) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) -US$8.90m -US$1.80m US$3.70m US$2.90m US$3.30m US$3.60m US$3.87m US$4.10m US$4.31m US$4.50m Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Analyst x1 Est @ 9.20% Est @ 7.32% Est @ 6.01% Est @ 5.09% Est @ 4.44% Present Value ($, Millions) Discounted @ 7.4% -US$8.3 -US$1.6 US$3.0 US$2.2 US$2.3 US$2.3 US$2.3 US$2.3 US$2.3 US$2.2 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$9.1m 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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$4.5m× (1 + 2.9%) ÷ (7.4%– 2.9%) = US$103m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$103m÷ ( 1 + 7.4%)10= US$50m The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$59m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$2.2, the company appears about fair value at a 4.9% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. 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. 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 Spectral AI 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 7.4%, which is based on a levered beta of 1.040. 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 Spectral AI Strength Debt is well covered by earnings. Weakness Shareholders have been diluted in the past year. Opportunity Forecast to reduce losses next year. Current share price is below our estimate of fair value. Threat Debt is not well covered by operating cash flow. Has less than 3 years of cash runway based on current free cash flow. Total liabilities exceed total assets, which raises the risk of financial distress. Not expected to become profitable over the next 3 years. Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Spectral AI, we've put together three essential factors you should further research: Risks: Take risks, for example - Spectral AI has 4 warning signs (and 2 which make us uncomfortable) we think you should know about. Future Earnings: How does MDAI'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 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! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQCM 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) 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.
Yahoo
19-06-2025
- Business
- Yahoo
Is There An Opportunity With Ansell Limited's (ASX:ANN) 42% Undervaluation?
The projected fair value for Ansell is AU$52.53 based on 2 Stage Free Cash Flow to Equity Current share price of AU$30.54 suggests Ansell is potentially 42% undervalued Our fair value estimate is 45% higher than Ansell's analyst price target of US$36.17 Today we will run through one way of estimating the intrinsic value of Ansell Limited (ASX:ANN) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) US$163.9m US$220.1m US$235.6m US$247.5m US$258.4m US$268.6m US$278.5m US$288.1m US$297.6m US$307.1m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x4 Est @ 5.04% Est @ 4.41% Est @ 3.97% Est @ 3.67% Est @ 3.45% Est @ 3.30% Est @ 3.20% Present Value ($, Millions) Discounted @ 7.6% US$152 US$190 US$189 US$184 US$179 US$173 US$166 US$160 US$154 US$147 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$1.7b The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.6%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$307m× (1 + 2.9%) ÷ (7.6%– 2.9%) = US$6.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$6.8b÷ ( 1 + 7.6%)10= US$3.2b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$4.9b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$30.5, the company appears quite good value at a 42% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. 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 Ansell 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 7.6%, which is based on a levered beta of 1.080. 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 Ansell Strength Earnings growth over the past year exceeded its 5-year average. Debt is not viewed as a risk. Dividends are covered by earnings and cash flows. Weakness Earnings growth over the past year underperformed the Medical Equipment industry. Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market. Opportunity Annual earnings are forecast to grow faster than the Australian market. Good value based on P/E ratio and estimated fair value. Threat Annual revenue is forecast to grow slower than the Australian market. Valuation is only one side of the coin in terms of building your investment thesis, and 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. 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. Why is the intrinsic value higher than the current share price? For Ansell, we've put together three further aspects you should further examine: Risks: For example, we've discovered 1 warning sign for Ansell that you should be aware of before investing here. Future Earnings: How does ANN'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 Australian 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) 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. Error while retrieving data Sign in to access your portfolio Error while retrieving data Error while retrieving data Error while retrieving data Error while retrieving data
Yahoo
15-06-2025
- Business
- Yahoo
Is Frontdoor, Inc. (NASDAQ:FTDR) Trading At A 24% Discount?
Using the 2 Stage Free Cash Flow to Equity, Frontdoor fair value estimate is US$73.99 Frontdoor is estimated to be 24% undervalued based on current share price of US$56.43 The US$55.50 analyst price target for FTDR is 25% less than our estimate of fair value In this article we are going to estimate the intrinsic value of Frontdoor, Inc. (NASDAQ:FTDR) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) US$278.4m US$294.2m US$281.0m US$275.2m US$273.6m US$275.0m US$278.3m US$283.2m US$289.1m US$295.9m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x1 Est @ -2.06% Est @ -0.56% Est @ 0.49% Est @ 1.22% Est @ 1.74% Est @ 2.10% Est @ 2.35% Present Value ($, Millions) Discounted @ 7.3% US$259 US$256 US$228 US$208 US$193 US$180 US$170 US$162 US$154 US$147 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$2.0b 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 (2.9%) 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 7.3%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$296m× (1 + 2.9%) ÷ (7.3%– 2.9%) = US$7.0b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$7.0b÷ ( 1 + 7.3%)10= US$3.5b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$5.4b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$56.4, the company appears a touch undervalued at a 24% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. 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 Frontdoor 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 7.3%, which is based on a levered beta of 1.000. 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. Check out our latest analysis for Frontdoor Strength Earnings growth over the past year exceeded the industry. Debt is well covered by earnings and cashflows. Weakness No major weaknesses identified for FTDR. Opportunity Annual earnings are forecast to grow for the next 3 years. Good value based on P/E ratio and estimated fair value. Threat Annual earnings are forecast to grow slower than the American market. Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. What is the reason for the share price sitting below the intrinsic value? For Frontdoor, we've compiled three further aspects you should look at: Risks: Be aware that Frontdoor is showing 2 warning signs in our investment analysis , you should know about... Future Earnings: How does FTDR'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS 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) 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. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
31-05-2025
- Business
- Yahoo
Is MONY Group plc (LON:MONY) Trading At A 40% Discount?
Using the 2 Stage Free Cash Flow to Equity, MONY Group fair value estimate is UK£3.46 MONY Group's UK£2.09 share price signals that it might be 40% undervalued Our fair value estimate is 35% higher than MONY Group's analyst price target of UK£2.56 Today we will run through one way of estimating the intrinsic value of MONY Group plc (LON:MONY) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple! 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. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. 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 start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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 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 (£, Millions) UK£97.4m UK£105.0m UK£107.4m UK£109.7m UK£112.2m UK£114.8m UK£117.6m UK£120.5m UK£123.5m UK£126.5m Growth Rate Estimate Source Analyst x2 Analyst x3 Analyst x2 Est @ 2.17% Est @ 2.28% Est @ 2.36% Est @ 2.41% Est @ 2.45% Est @ 2.48% Est @ 2.50% Present Value (£, Millions) Discounted @ 8.0% UK£90.2 UK£90.0 UK£85.2 UK£80.5 UK£76.3 UK£72.3 UK£68.5 UK£65.0 UK£61.6 UK£58.5 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = UK£748m The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 8.0%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = UK£127m× (1 + 2.5%) ÷ (8.0%– 2.5%) = UK£2.4b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£2.4b÷ ( 1 + 8.0%)10= UK£1.1b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£1.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of UK£2.1, the company appears quite good value at a 40% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 MONY Group 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 8.0%, which is based on a levered beta of 1.069. 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 MONY Group 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. Dividend is in the top 25% of dividend payers in the market. Weakness No major weaknesses identified for MONY. Opportunity Annual earnings are forecast to grow for the next 3 years. Good value based on P/E ratio and estimated fair value. Threat Annual earnings are forecast to grow slower than the British market. Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For MONY Group, there are three important aspects you should explore: Financial Health: Does MONY 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 MONY'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 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! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE 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) 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. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
18-05-2025
- Business
- Yahoo
Estimating The Fair Value Of FITTERS Diversified Berhad (KLSE:FITTERS)
FITTERS Diversified Berhad's estimated fair value is RM0.028 based on 2 Stage Free Cash Flow to Equity FITTERS Diversified Berhad's RM0.03 share price indicates it is trading at similar levels as its fair value estimate Industry average of 226% suggests FITTERS Diversified Berhad's peers are currently trading at a higher premium to fair value Today we will run through one way of estimating the intrinsic value of FITTERS Diversified Berhad (KLSE:FITTERS) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. 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. 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. 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: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (MYR, Millions) RM8.87m RM6.98m RM6.02m RM5.50m RM5.23m RM5.11m RM5.08m RM5.11m RM5.19m RM5.31m Growth Rate Estimate Source Est @ -31.91% Est @ -21.26% Est @ -13.80% Est @ -8.58% Est @ -4.93% Est @ -2.37% Est @ -0.58% Est @ 0.68% Est @ 1.55% Est @ 2.17% Present Value (MYR, Millions) Discounted @ 11% RM8.0 RM5.7 RM4.5 RM3.7 RM3.2 RM2.8 RM2.5 RM2.3 RM2.1 RM2.0 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM37m 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 11%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM5.3m× (1 + 3.6%) ÷ (11%– 3.6%) = RM79m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM79m÷ ( 1 + 11%)10= RM29m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM66m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.03, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. 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 FITTERS Diversified 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 11%, which is based on a levered beta of 1.167. 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 FITTERS Diversified Berhad Strength Debt is not viewed as a risk. Weakness Current share price is above our estimate of fair value. Opportunity Has sufficient cash runway for more than 3 years based on current free cash flows. Lack of analyst coverage makes it difficult to determine FITTERS' earnings prospects. Threat No apparent threats visible for FITTERS. Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For FITTERS Diversified Berhad, there are three pertinent items you should further research: Risks: For example, we've discovered 3 warning signs for FITTERS Diversified Berhad (2 shouldn't be ignored!) that you should be aware of before investing here. 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! 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) 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. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
