In previous
articles, the basic concepts of DCF valuation such as time value money, FCFF,
and WACC were discussed (Read more here), (Read more here), and (Read more here).
The next
step is to forecast the future FCFF stream.
Normally analysts will forecast the numbers based on their understanding
of the company business and development.
For beginner, you can refer to research reports that are available for
free on Bursa Market Place.
As promised,
we are going to analyse Top Glove. The
following tables are the summary of analysts forecast. All analysts are expecting the revenue of Top
Glove to be either doubled or tripled in 2021, but will decline starting
2022. Which means the supernormal demand
and high selling price of glove is not sustainable.
Most research reports will not provide forecast beyond three years, some even only provide two years forecast. Thus, forecasting beyond 3 years horizon is challenging but in DCF model, based on Damodaran spreadsheet (Download here), at least 10 years horizon is required and estimating the terminal value is very important. Terminal value means at a certain point of time, the company will grow at a nominal rate forever. The usual assumption is the FD rate ten years later. In order to cover the uncertainty of long term growth rate, it is recommended to have 3 different scenario, average, min, and max. Same assumption is applicable to WACC, Revenue, and EBIT forecast.
|
Top Glove
Revenue Forecast |
||||||
|
Research
House |
2021F |
2022F |
2023F |
Report Date |
Source |
|
|
MayBank |
27,796.0 |
17,793.0 |
15,520.0 |
8-Oct-20 |
|
|
|
Public |
17,827.9 |
12,345.9 |
10,672.9 |
18-Sep-20 |
|
|
|
JF
APEX |
12,513.0 |
8,057.3 |
n/a |
30-Sep-20 |
|
|
|
AFFIN |
16,882.9 |
10,922.5 |
10,759.0 |
17-Sep-20 |
|
|
|
Kenanga |
17,290.0 |
13,514.0 |
n/a |
18-Sep-20 |
|
|
|
Aminvest |
21,810.7 |
11,589.7 |
9,229.3 |
18-Sep-20 |
|
|
|
MIDF |
12,852.0 |
10,710.0 |
9,481.5 |
18-Sep-20 |
|
|
|
HLBANK |
14,598.6 |
10,261.2 |
n/a |
18-Sep-20 |
|
|
|
Average |
17,696.4 |
11,899.2 |
11,132.5 |
|
||
|
Min |
12,513.0 |
8,057.3 |
9,229.3 |
|
||
|
Max |
27,796.0 |
17,793.0 |
15,520.0 |
|
||
|
Top Glove EBIT
Forecast |
|||||
|
Research
House |
2021F |
2022F |
2023F |
Report Date |
Source |
|
MayBank |
14,794.9 |
5,554.6 |
2,281.9 |
8-Oct-20 |
|
|
Public |
10,622.4 |
4,929.0 |
2,893.3 |
18-Sep-20 |
|
|
JF
APEX |
5,630.9 |
1,611.5 |
n/a |
30-Sep-20 |
|
|
AFFIN |
n/a |
n/a |
n/a |
17-Sep-20 |
|
|
Kenanga |
n/a |
n/a |
n/a |
18-Sep-20 |
|
|
Aminvest |
7,963.8 |
2,867.3 |
1,513.8 |
18-Sep-20 |
|
|
MIDF |
5,996.4 |
2,533.7 |
1,880.7 |
18-Sep-20 |
|
|
HLBANK |
7,310.6 |
3,732.6 |
n/a |
18-Sep-20 |
|
|
Average |
8,719.8 |
3,538.1 |
2,142.4 |
||
|
Min |
5,630.9 |
1,611.5 |
1,513.8 |
||
|
Max |
14,794.9 |
5,554.6 |
2,893.3 |
||
|
|
Min |
Average |
Max |
|
WACC |
7.43% |
8.61% |
9.80% |
|
Terminal growth rate |
2% |
3% |
4% |
The
spreadsheet framework that we are going to use here is the simplified version
of Damodaran spreadsheet. We will be
estimating the value of Top Glove based on average condition. There are a lot of cells that need to be
filled in order to complete the sheet thus it will not be easy to explain in
words and sentences. Thus, an additional
sheet that shows all the formula will be embedded as well. Drop your questions on engineering2finance
facebook page if you have any questions (link).
Keep in mind
that there are many assumptions made in formulating the model. These assumptions did not go thru due
diligence exercise, and most of the time they are made for easy understanding rather
than accuracy. However, the numbers
in each cells are derived based on sensible financial principle rather than haphazardly.
Finally,
let’s come back to the most important question – what is the value of Top Glove
based on this DCF model?
Here you
go.
Try to build you own spreadsheet to find the Max value and post your answer on the engineering2finance facebook page (link).
REMINDER! The example – Top Glove, used in this DCF
model is meant for education purpose, to help readers to better understand the
building block of DCF model. It should
not be interpreted, or relied upon, as financial or business advice. Please consult licensed investment advisors
for proper investment advice.
Good luck and have fun!
Disclaimer:
The above analysis does not imply any buy or sell recommendation. The
author disclaims all liabilities arising from any use of the information
contained in this article.
Disclosure: The author may have interest in the stocks of the companies in this article.
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