Key Insights
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The projected fair value for Cypark Resources Berhad is RM1.02 based on 2 Stage Free Cash Flow to Equity
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Cypark Resources Berhad's RM0.71 share price signals that it might be 30% undervalued
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Our fair value estimate is 13% higher than Cypark Resources Berhad's analyst price target of RM0.91
Does the December share price for Cypark Resources Berhad ( KLSE:CYPARK ) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing 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.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model .
The 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 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:
10-year free cash flow (FCF) estimate
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (MYR, Millions) |
RM26.5m |
RM131.7m |
RM119.3m |
RM113.1m |
RM110.2m |
RM109.4m |
RM110.1m |
RM111.8m |
RM114.3m |
RM117.4m |
| Growth Rate Estimate Source |
Analyst x1 |
Analyst x1 |
Analyst x1 |
Est @ -5.24% |
Est @ -2.55% |
Est @ -0.67% |
Est @ 0.64% |
Est @ 1.56% |
Est @ 2.21% |
Est @ 2.66% |
| Present Value (MYR, Millions) Discounted @ 14% |
RM23.2 |
RM101 |
RM80.3 |
RM66.7 |
RM57.0 |
RM49.6 |
RM43.8 |
RM38.9 |
RM34.9 |
RM31.4 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= RM527m
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. 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 3.7%. We discount the terminal cash flows to today's value at a cost of equity of 14%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = RM117m× (1 + 3.7%) ÷ (14%– 3.7%) = RM1.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM1.2b÷ ( 1 + 14%)10= RM314m
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 RM841m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM0.7, the company appears quite good value at a 30% 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.
Important Assumptions
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 Cypark Resources 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 14%, which is based on a levered beta of 1.737. 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 Cypark Resources Berhad
Moving On:
Whilst important, the DCF calculation 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. 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 Cypark Resources Berhad, we've compiled three relevant factors you should explore:
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Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Cypark Resources Berhad , and understanding it should be part of your investment process.
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Future Earnings: How does CYPARK'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 .
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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.
