A Look At The Fair Value Of HPP Holdings Berhad (KLSE:HPPHB)

editorial-team@simplywallst.com (Simply Wall St)

Thu, Nov 30, 2023, 10:05 PM 6 min read

Key Insights

The projected fair value for HPP Holdings Berhad is RM0.42 based on 2 Stage Free Cash Flow to Equity
With RM0.35 share price, HPP Holdings Berhad appears to be trading close to its estimated fair value
Analyst price target for HPPHB is RM0.53, which is 27% above our fair value estimate

Does the December share price for HPP Holdings Berhad (KLSE:HPPHB) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for HPP Holdings Berhad

Crunching The Numbers

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate 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:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM11.3m	RM11.3m	RM9.94m	RM9.98m	RM10.1m	RM10.3m	RM10.6m	RM10.9m	RM11.2m	RM11.6m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 0.45%	Est @ 1.38%	Est @ 2.03%	Est @ 2.49%	Est @ 2.81%	Est @ 3.03%	Est @ 3.19%
Present Value (MYR, Millions) Discounted @ 9.0%	RM10.4	RM9.5	RM7.7	RM7.1	RM6.6	RM6.2	RM5.8	RM5.5	RM5.2	RM4.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM69m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 3.6%. We discount the terminal cash flows to today's value at a cost of equity of 9.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM12m× (1 + 3.6%) ÷ (9.0%– 3.6%) = RM220m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM220m÷ ( 1 + 9.0%)¹⁰= RM93m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM161m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM0.3, the company appears about fair value at a 16% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — KLSE:HPPHB Discounted Cash Flow December 1st 2023

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 HPP 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 9.0%, which is based on a levered beta of 0.800. 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 HPP Holdings Berhad

Strength

Debt is not viewed as a risk.

Dividends are covered by earnings and cash flows.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Packaging market.

Opportunity

Annual earnings are forecast to grow faster than the Malaysian market.

Current share price is below our estimate of fair value.

Threat

Revenue is forecast to grow slower than 20% per year.

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. 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?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For HPP Holdings Berhad, there are three further items you should explore:

Risks: Every company has them, and we've spotted 2 warning signs for HPP Holdings Berhad you should know about.
Future Earnings: How does HPPHB'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 all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

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.

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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.