Key Insights
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The projected fair value for Baker Technology is S$0.54 based on 2 Stage Free Cash Flow to Equity
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With S$0.53 share price, Baker Technology appears to be trading close to its estimated fair value
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When compared to the industry average discount to fair value of 68%, Baker Technology's competitors seem to be trading at a greater discount
In this article we are going to estimate the intrinsic value of Baker Technology Limited ( SGX:BTP ) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 .
The Method
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (SGD, Millions) |
S$7.16m |
S$5.92m |
S$5.25m |
S$4.87m |
S$4.67m |
S$4.56m |
S$4.53m |
S$4.53m |
S$4.58m |
S$4.64m |
| Growth Rate Estimate Source |
Est @ -25.76% |
Est @ -17.27% |
Est @ -11.33% |
Est @ -7.17% |
Est @ -4.26% |
Est @ -2.22% |
Est @ -0.80% |
Est @ 0.20% |
Est @ 0.90% |
Est @ 1.39% |
| Present Value (SGD, Millions) Discounted @ 6.2% |
S$6.7 |
S$5.2 |
S$4.4 |
S$3.8 |
S$3.5 |
S$3.2 |
S$3.0 |
S$2.8 |
S$2.7 |
S$2.5 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= S$38m
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 6.2%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = S$4.6m× (1 + 2.5%) ÷ (6.2%– 2.5%) = S$130m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$130m÷ ( 1 + 6.2%)10= S$71m
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$109m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of S$0.5, the company appears about fair value at a 1.2% 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.
The 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 Baker Technology 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 6.2%, which is based on a levered beta of 0.867. 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 Baker Technology
SWOT Analysis for Baker Technology
Strength
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Debt is not viewed as a risk.
Weakness
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Dividend is low compared to the top 25% of dividend payers in the Energy Services market.
Opportunity
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Has sufficient cash runway for more than 3 years based on current free cash flows.
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Current share price is below our estimate of fair value.
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Lack of analyst coverage makes it difficult to determine BTP's earnings prospects.
Threat
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Paying a dividend but company is unprofitable.
Moving On:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Baker Technology, we've compiled three fundamental items you should further examine:
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Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Baker Technology , and understanding these should be part of your investment process.
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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!
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Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SGX 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.
