Homeritz Corporation Berhad, a Malaysian company listed on the Kuala Lumpur Stock Exchange (KLSE:HOMERIZ), appears to be undervalued by as much as 34% according to a discounted cash flow (DCF) analysis. The DCF model is a valuation method commonly used to estimate the attractiveness of an investment opportunity by discounting expected future cash flows to their present value.
Using a two-stage DCF model, which accounts for different stages of growth, the analysis extrapolates the previous free cash flow (FCF) of the company to estimate the next ten years of cash flows. The model assumes that companies with shrinking free cash flow will slow their rate of shrinkage, while those with growing free cash flow will experience a slower growth rate over the same period. After discounting these future cash flows, the present value of the ten-year cash flow is estimated to be approximately RM191 million.
The analysis also calculates the Terminal Value, which represents all the future cash flows beyond the initial ten-year period. This is done using the Gordon Growth formula, with a future annual growth rate equal to the 5-year average of the 10-year government bond yield, which is set at 3.6%. By discounting the terminal cash flows to their present value at a cost of equity of 13%, the equity value of the company is determined to be RM332 million.
Comparing this value to the current share price of RM0.5, Homeritz Corporation Berhad appears to be trading at a significant discount of approximately 34%. However, it is important to note that the DCF model is just one method of valuation and that other factors, such as industry cyclicality and the company’s future capital requirements, are not fully accounted for.
Additionally, the analysis acknowledges that the most significant inputs in a DCF are the discount rate and the actual cash flows. Adjustments to these inputs can have a significant impact on the valuation. The cost of equity is used as the discount rate in this calculation, based on a levered beta of 1.130. Beta measures a stock’s volatility compared to the market, and in this case, it is derived from the industry average beta of globally comparable companies.
While the DCF model provides valuable insights into the potential undervaluation of Homeritz Corporation Berhad, it is essential to conduct a comprehensive analysis that considers other factors as well. This includes examining the company’s growth prospects, industry trends, and overall financial performance. Investors should use this valuation as a starting point and engage in further research and analysis to make informed investment decisions.
Please note that this news article is based on historical data and analyst forecasts, and it does not constitute financial advice. Before making any investment decisions, it is recommended to consult with a qualified financial advisor and consider individual objectives and financial situations.
