Estimating The Fair Value Of Hartalega Holdings Berhad (KLSE ...

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Estimating The Fair Value Of Hartalega Holdings Berhad KLSE

Key Insights Using the 2 Stage Free Cash Flow to Equity, Hartalega Holdings Berhad fair value estimate is RM2.40...

Using the 2 Stage Free Cash Flow to Equity, Hartalega Holdings Berhad fair value estimate is RM2.40
Current share price of RM2.61 suggests Hartalega Holdings Berhad is potentially trading close to its fair value
Analyst price target for HARTA is RM3.66, which is 53% above our fair value estimate

How far off is Hartalega Holdings Berhad (KLSE:HARTA) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Hartalega Holdings Berhad

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. 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:

2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (MYR, Millions)	RM20.7m	RM227.0m	RM313.5m	RM415.0m	RM490.0m	RM547.6m	RM598.6m	RM644.1m	RM685.3m	RM723.4m
Growth Rate Estimate Source	Analyst x6	Analyst x6	Analyst x6	Analyst x1	Analyst x1	Est @ 11.76%	Est @ 9.31%	Est @ 7.60%	Est @ 6.40%	Est @ 5.56%
Present Value (MYR, Millions) Discounted @ 9.2%	RM19.0	RM190	RM241	RM292	RM316	RM323	RM323	RM319	RM310	RM300

("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM2.6b

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 (3.6%) 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 9.2%.

Story Continues

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM723m× (1 + 3.6%) ÷ (9.2%– 3.6%) = RM13b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM13b÷ ( 1 + 9.2%)10= RM5.6b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM8.2b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of RM2.6, 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.

KLSE:HARTA Discounted Cash Flow February 18th 2025

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 Hartalega Holdings 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 9.2%, which is based on a levered beta of 0.944. 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.

Strength

Weakness

Opportunity

Threat

Valuation is only one side of the coin in terms of building your investment thesis, and it 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 Hartalega Holdings Berhad, we've compiled three relevant items you should look at:

Risks: For example, we've discovered 1 warning sign for Hartalega Holdings Berhad that you should be aware of before investing here.
Future Earnings: How does HARTA'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.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.