Key Insights
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Using the 2 Stage Free Cash Flow to Equity, D & O Green Technologies Berhad fair value estimate is RM0.89
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Current share price of RM0.62 suggests D & O Green Technologies Berhad is potentially 31% undervalued
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Analyst price target for D&O is RM0.98, which is 9.5% above our fair value estimate
Does the January share price for D & O Green Technologies Berhad ( KLSE:D&O ) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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.
What's The Estimated Valuation?
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, 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
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (MYR, Millions) |
RM99.0m |
RM132.0m |
RM157.8m |
RM181.1m |
RM201.8m |
RM220.3m |
RM236.8m |
RM251.9m |
RM265.9m |
RM279.3m |
| Growth Rate Estimate Source |
Analyst x1 |
Analyst x1 |
Est @ 19.52% |
Est @ 14.78% |
Est @ 11.46% |
Est @ 9.13% |
Est @ 7.51% |
Est @ 6.37% |
Est @ 5.57% |
Est @ 5.01% |
| Present Value (MYR, Millions) Discounted @ 16% |
RM85.6 |
RM98.7 |
RM102 |
RM101 |
RM97.5 |
RM92.0 |
RM85.5 |
RM78.6 |
RM71.7 |
RM65.1 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= RM878m
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 16%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = RM279m× (1 + 3.7%) ÷ (16%– 3.7%) = RM2.4b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM2.4b÷ ( 1 + 16%)10= RM565m
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 RM1.4b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.6, the company appears quite good value at a 31% 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.
The 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 D & O Green Technologies 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 16%, which is based on a levered beta of 2.000. 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.
View our latest analysis for D & O Green Technologies Berhad
SWOT Analysis for D & O Green Technologies Berhad
Strength
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Net debt to equity ratio below 40%.
Weakness
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Dividend is low compared to the top 25% of dividend payers in the Semiconductor market.
Opportunity
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Expected to breakeven next year.
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Has sufficient cash runway for more than 3 years based on current free cash flows.
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Good value based on P/S ratio and estimated fair value.
Threat
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Debt is not well covered by operating cash flow.
Moving On:
Whilst important, the DCF calculation 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. 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. Can we work out why the company is trading at a discount to intrinsic value? For D & O Green Technologies Berhad, there are three relevant factors you should assess:
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Risks: Case in point, we've spotted 1 warning sign for D & O Green Technologies Berhad you should be aware of.
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Future Earnings: How does D&O'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. 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.
