Determining the Fair Value of XOX Berhad (KLSE:XOX): A DCF and Comparative Valuation Analysis

Introduction

XOX Berhad (KLSE:XOX), a Malaysian telecommunications and technology company, has shown mixed financial performance in recent quarters. While its revenue grew by 156% year-on-year in Q2 2025 to MYR 3.67 million for its subsidiary Xox Networks, the parent company reported a net loss of MYR 2.847 million for the same period [1]. This article evaluates XOX’s fair value using discounted cash flow (DCF) and comparative valuation analysis, addressing the challenges of limited forward-looking data and volatile cash flows.

Discounted Cash Flow (DCF) Analysis: Navigating Uncertainty

DCF analysis hinges on projecting free cash flows and discounting them at the weighted average cost of capital (WACC). For XOX, this approach is complicated by the absence of explicit 2025–2030 free cash flow forecasts. However, historical trends and market expectations provide a partial roadmap:

1. Free Cash Flow Trends:
2. XOX’s levered free cash flow for the trailing twelve months (TTM) was MYR 38.91 million, while unlevered free cash flow was negative at -MYR 7.24 million [2]. This discrepancy suggests operational cash flow is being used to service debt or reinvest in the business.

3. A peak unlevered free cash flow yield of 66.3% in March 2025 indicates potential for improved efficiency, though this must be contextualized with the company’s broader financial stress, including a Q1 2025 net loss of MYR 21.2 million [3].

4. Growth Assumptions:

5. A 205.42% revenue increase over five years (as per market forecasts) implies aggressive growth assumptions [4]. Applying this to unlevered free cash flow would require significant operational improvements, such as cost reductions or margin expansion.

6. Sensitivity analysis is critical here. For instance, a 10% reduction in growth assumptions could halve the intrinsic value derived from DCF.

7. WACC Estimation:

8. XOX’s beta (5Y) is 1.08, indicating slightly higher volatility than the market [5]. Using a risk-free rate of 3.5% and a market risk premium of 5%, the cost of equity approximates 9.4% (CAPM: 3.5% + 1.08 × 5%).
9. The cost of debt is 7.44% [6], and the debt-to-equity ratio is 26.42% [7]. Assuming a 20% tax rate, the WACC calculation would be:
   $$ \text{WACC} = \left( \frac{0.7358}{1.2642} \times 9.4\% \right) + \left( \frac{0.2642}{1.2642} \times 7.44\% \times (1 - 0.2) \right) \approx 8.3\% $$
10. This WACC is relatively low, reflecting XOX’s modest leverage, but the negative unlevered free cash flow complicates DCF accuracy.

Comparative Valuation: A Mixed Signal

Comparative analysis using industry multiples reveals divergent signals:

1. P/E Ratio:

2. XOX’s trailing P/E ratio is 21.2x [8], significantly higher than the industry average of 15x. This suggests the market is pricing in future growth, but it also implies a premium for a company currently posting losses.

3. EV/EBITDA:

4. At 1.8x [8], XOX’s EV/EBITDA is low, potentially indicating undervaluation if EBITDA improves. However, this metric is sensitive to debt levels; XOX’s net debt/EBITDA of 0.1x in 2024 [9] suggests manageable leverage but masks recent operational losses.

5. Intrinsic Value Discrepancy:

6. A DCF model using the 205.42% growth assumption yields an intrinsic value of MYR 0.79, compared to the current market price of MYR 0.24 [10]. This 225% upside is enticing but hinges on unrealistic operational improvements.

Conclusion: A High-Risk, High-Reward Proposition

XOX Berhad’s valuation presents a paradox: DCF models suggest substantial upside, while comparative metrics highlight a premium for a loss-making entity. The key risks include:
- Negative unlevered free cash flow, which could persist without significant cost-cutting or margin expansion.
- Revenue volatility, as evidenced by XOX Technology’s 19% full-year 2025 revenue decline [1].
- Market expectations, which may not materialize given the company’s recent financial stress.

For investors, XOX is a speculative bet. A DCF-based investment would require a high confidence in operational turnaround, while comparative valuation suggests caution. The intrinsic value of MYR 0.79 [10] is compelling, but it assumes a 205.42% revenue surge—a scenario that demands rigorous due diligence on XOX’s strategic initiatives and cost management.

Source:

[1] XOX BHD Announces Q2 FY2025 Financial Results [https://klse.i3investor.com/web/announcement/detail/1966224]
[2] XOX Berhad (0165.KL) Valuation Measures & Financial [https://finance.yahoo.com/quote/0165.KL/key-statistics/]
[3] XOX Berhad First Quarter 2025 Earnings [https://finance.yahoo.com/news/xox-berhad-first-quarter-2025-013521589.html]
[4] XOX Bhd Stock Forecast [https://walletinvestor.com/klse-stock-forecast/0165-stock-prediction]
[5] Beta (5 Year) For XOX Bhd [https://finbox.com/KLSE:XOX/explorer/beta]
[6] XOX.KL Intrinsic Value [https://www.valueinvesting.io/XOX.KL/valuation/intrinsic-value]
[7] XOX Berhad (0165.KL) Valuation Measures & Financial [https://finance.yahoo.com/quote/0165.KL/key-statistics/]
[8] XOX Berhad (KLSE:XOX) Stock Valuation [https://simplywall.st/stocks/my/telecom/klse-xox/xox-berhad-shares/valuation]
[9] Net Debt / EBITDA For XOX Berhad [https://finbox.com/KLSE:XOX-PA/explorer/net_debt_to_ebitda]
[10] XOX.KL Intrinsic Value [https://www.valueinvesting.io/XOX.KL/valuation/intrinsic-value]