A Look At The Fair Value Of Poh Huat Resources Holdings Berhad (KLSE:POHUAT)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Poh Huat Resources Holdings Berhad fair value estimate is RM1.65

• Current share price of RM1.45 suggests Poh Huat Resources Holdings Berhad is potentially trading close to its fair value

• Peers of Poh Huat Resources Holdings Berhad are currently trading on average at a 127% premium

Does the June share price for Poh Huat Resources Holdings Berhad (KLSE:POHUAT) reflect what it's really worth? Today, we will estimate the stock's intrinsic value 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. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Poh Huat Resources Holdings Berhad

The Model

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. 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:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM39.1m	RM38.7m	RM38.8m	RM39.3m	RM40.0m	RM41.0m	RM42.1m	RM43.4m	RM44.8m	RM46.2m
Growth Rate Estimate Source	Est @ -3.13%	Est @ -1.13%	Est @ 0.28%	Est @ 1.26%	Est @ 1.95%	Est @ 2.43%	Est @ 2.76%	Est @ 3.00%	Est @ 3.16%	Est @ 3.28%
Present Value (MYR, Millions) Discounted @ 12%	RM35.1	RM31.1	RM28.0	RM25.4	RM23.2	RM21.3	RM19.6	RM18.1	RM16.8	RM15.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM234m

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 3.6%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM46m× (1 + 3.6%) ÷ (12%– 3.6%) = RM601m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM601m÷ ( 1 + 12%)¹⁰= RM202m

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 RM436m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM1.5, the company appears about fair value at a 12% 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.

dcf

Important 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. 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 Poh Huat Resources 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 12%, which is based on a levered beta of 1.255. 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 Poh Huat Resources Holdings Berhad

Strength

• Currently debt free.

• Dividends are covered by earnings and cash flows.

• Dividend is in the top 25% of dividend payers in the market.

Weakness

• Earnings declined over the past year.

Opportunity

• Annual revenue is forecast to grow faster than the Malaysian market.

• Good value based on P/E ratio and estimated fair value.

Threat

• No apparent threats visible for POHUAT.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Poh Huat Resources Holdings Berhad, we've compiled three relevant items you should explore:

1. Risks: As an example, we've found 2 warning signs for Poh Huat Resources Holdings Berhad that you need to consider before investing here.

2. Future Earnings: How does POHUAT'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.

3. 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. 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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com