Estimating The Intrinsic Value Of Reclaims Global Limited (Catalist:NEX)
Simply Wall St
6 min read
Key Insights
The projected fair value for Reclaims Global is S$0.18 based on 2 Stage Free Cash Flow to Equity
With S$0.15 share price, Reclaims Global appears to be trading close to its estimated fair value
Peers of Reclaims Global are currently trading on average at a 674% premium
Today we will run through one way of estimating the intrinsic value of Reclaims Global Limited (Catalist:NEX) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
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. 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 (SGD, Millions)
S$1.99m
S$1.61m
S$1.40m
S$1.28m
S$1.21m
S$1.17m
S$1.16m
S$1.15m
S$1.15m
S$1.16m
Growth Rate Estimate Source
Est @ -28.44%
Est @ -19.32%
Est @ -12.93%
Est @ -8.46%
Est @ -5.32%
Est @ -3.13%
Est @ -1.60%
Est @ -0.53%
Est @ 0.23%
Est @ 0.75%
Present Value (SGD, Millions) Discounted @ 6.5%
S$1.9
S$1.4
S$1.2
S$1.0
S$0.9
S$0.8
S$0.7
S$0.7
S$0.7
S$0.6
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = S$9.8m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.0%) 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 6.5%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$26m÷ ( 1 + 6.5%)10= S$14m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$24m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of S$0.2, the company appears about fair value at a 16% 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.
Catalist:NEX Discounted Cash Flow September 13th 2023
Important Assumptions
Now 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 Reclaims Global 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 6.5%, which is based on a levered beta of 0.913. 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 Reclaims Global
Strength
Debt is not viewed as a risk.
Weakness
Earnings declined over the past year.
Opportunity
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine NEX's earnings prospects.
Threat
No apparent threats visible for NEX.
Looking Ahead:
Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Reclaims Global, there are three essential factors you should further research:
Risks: For example, we've discovered 2 warning signs for Reclaims Global (1 makes us a bit uncomfortable!) 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!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the CATALIST every day. If you want to find the calculation for other stocks 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.
