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Key Insights

The projected fair value for Kobay Technology Bhd is RM1.41 based on 2 Stage Free Cash Flow to Equity

Kobay Technology Bhd’s RM1.69 share price indicates it is trading at similar levels as its fair value estimate

Kobay Technology Bhd’s peers seem to be trading at a higher premium to fair value based onthe industry average of 97%
Today we will run through one way of estimating the intrinsic value of Kobay Technology Bhd. (KLSE:KOBAY) by taking the forecast future cash flows of the company and discounting them back to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Kobay Technology Bhd
The Model
We use what is known as a 2stage 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. 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.
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:
10year free cash flow (FCF) forecast
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 
2032 
2033 

Levered FCF (MYR, Millions) 
RM45.8m 
RM42.2m 
RM40.4m 
RM39.7m 
RM39.6m 
RM39.9m 
RM40.6m 
RM41.5m 
RM42.6m 
RM43.8m 
Growth Rate Estimate Source 
Analyst x1 
Analyst x1 
Est @ 4.21% 
Est @ 1.88% 
Est @ 0.25% 
Est @ 0.89% 
Est @ 1.69% 
Est @ 2.25% 
Est @ 2.64% 
Est @ 2.91% 
Present Value (MYR, Millions) Discounted @ 11% 
RM41.2 
RM34.2 
RM29.5 
RM26.0 
RM23.3 
RM21.2 
RM19.4 
RM17.8 
RM16.5 
RM15.3 
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10year Cash Flow (PVCF) = RM244m
After calculating the present value of future cash flows in the initial 10year 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 5year average of the 10year government bond yield of 3.6%. We discount the terminal cash flows to today’s value at a cost of equity of 11%.
Terminal Value (TV)= FCF_{2033} × (1 + g) ÷ (r – g) = RM44m× (1 + 3.6%) ÷ (11%– 3.6%) = RM598m
Present Value of Terminal Value (PVTV)= TV / (1 + r)^{10}= RM598m÷ ( 1 + 11%)^{10}= RM208m
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 RM453m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM1.7, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Kobay Technology Bhd 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 11%, which is based on a levered beta of 1.112. 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.
SWOT Analysis for Kobay Technology Bhd
Strength
Weakness
Opportunity
Threat
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Kobay Technology Bhd, we’ve put together three fundamental items you should further research:

Risks: For instance, we’ve identified 1 warning sign for Kobay Technology Bhd that you should be aware of.

Future Earnings: How does KOBAY’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 High Quality Alternatives: Do you like a good allrounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KLSE every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorialteam (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 longterm focused analysis driven by fundamental data. Note that our analysis may not factor in the latest pricesensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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