A Look At The Fair Value Of Kotra Industries Berhad (KLSE:KOTRA)

editorial-team@simplywallst.com (Simply Wall St)

Sat, Jan 20, 2024, 5:11 PM 6 min read

Key Insights

Kotra Industries Berhad's estimated fair value is RM5.00 based on 2 Stage Free Cash Flow to Equity
Current share price of RM4.80 suggests Kotra Industries Berhad is potentially trading close to its fair value
The average premium for Kotra Industries Berhad's competitorsis currently 36%

Today we will run through one way of estimating the intrinsic value of Kotra Industries Berhad (KLSE:KOTRA) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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.

Check out our latest analysis for Kotra Industries Berhad

The Method

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 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM48.4m	RM46.9m	RM46.4m	RM46.5m	RM47.1m	RM48.0m	RM49.2m	RM50.6m	RM52.1m	RM53.7m
Growth Rate Estimate Source	Est @ -5.98%	Est @ -3.12%	Est @ -1.12%	Est @ 0.28%	Est @ 1.26%	Est @ 1.95%	Est @ 2.43%	Est @ 2.77%	Est @ 3.00%	Est @ 3.17%
Present Value (MYR, Millions) Discounted @ 9.0%	RM44.4	RM39.5	RM35.8	RM33.0	RM30.6	RM28.6	RM26.9	RM25.4	RM24.0	RM22.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM311m

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 9.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM54m× (1 + 3.6%) ÷ (9.0%– 3.6%) = RM1.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM1.0b÷ ( 1 + 9.0%)¹⁰= RM431m

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 RM742m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM4.8, the company appears about fair value at a 4.0% 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.

dcf — KLSE:KOTRA Discounted Cash Flow January 21st 2024

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 Kotra Industries 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 9.0%, which is based on a levered beta of 0.800. 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 Kotra Industries Berhad

Strength

Currently debt free.

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

Dividends are not covered by cash flow.

Looking Ahead:

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. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Kotra Industries Berhad, we've put together three pertinent items you should explore:

Risks: Case in point, we've spotted 1 warning sign for Kotra Industries Berhad you should be aware of.
Future Earnings: How does KOTRA'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 KLSE 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.