Key Insights
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The projected fair value for Baker Technology is S$0.47 based on 2 Stage Free Cash Flow to Equity
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With S$0.55 share price, Baker Technology appears to be trading close to its estimated fair value
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Industry average of 39% suggests Baker Technology's peers are currently trading at a higher premium to fair value
In this article we are going to estimate the intrinsic value of Baker Technology Limited ( SGX:BTP ) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Calculation
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 begin with, we have to get estimates of 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, 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 (SGD, Millions) |
S$7.15m |
S$5.91m |
S$5.24m |
S$4.86m |
S$4.65m |
S$4.54m |
S$4.50m |
S$4.50m |
S$4.54m |
S$4.59m |
| Growth Rate Estimate Source |
Est @ -25.79% |
Est @ -17.33% |
Est @ -11.41% |
Est @ -7.26% |
Est @ -4.36% |
Est @ -2.33% |
Est @ -0.91% |
Est @ 0.09% |
Est @ 0.78% |
Est @ 1.27% |
| Present Value (SGD, Millions) Discounted @ 6.6% |
S$6.7 |
S$5.2 |
S$4.3 |
S$3.8 |
S$3.4 |
S$3.1 |
S$2.9 |
S$2.7 |
S$2.5 |
S$2.4 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= S$37m
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 (2.4%) 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 6.6%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = S$4.6m× (1 + 2.4%) ÷ (6.6%– 2.4%) = S$111m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$111m÷ ( 1 + 6.6%)10= S$59m
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$96m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.6, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The 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 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 6.6%, which is based on a levered beta of 1.003. 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.
Check out 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.
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Current share price is above our estimate of fair value.
Opportunity
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Has sufficient cash runway for more than 3 years based on current free cash flows.
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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.
Next Steps:
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. 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. For Baker Technology, we've put together three additional aspects you should look at:
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Risks: For example, we've discovered 2 warning signs for Baker Technology that you should be aware of before investing here.
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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.
