Hi luzeeker, kcchong, it is an interesting topic. Allow me to express my two cents worth of view.

Let start with a quote:"The value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.” - Not quite sure if this quote originate from Warren or John Burr Williams, but the idea of discounted cash flow definitely originate from John.

As an investor, either as a bond holder, preferred stock holder, or commonstock holder, valuation could be different at different stage(i.e.A company bond maybe worth to invest but not necessary its common stock) but the principal is the same. An investor should value his/her investment holding based on the tangible cash they could get back in return. If follow John Burr Williams, it is dividend, as time goes by it evolve to be free cash flow to equity or possibly Warren has rephrased it as Owner Earnings. (cash flow generated from business activities and readily distributable as dividend)

I am not sure if Warren's Owner Earnings is referring to FCFF or FCFE, but I personally is using FCFE to calculate the intrinsic value of the company. I prefer using FCFE because as its name implied, it is the free cash flow to equity (readily distributable as dividend assuming no reinvestment activities) and commonstock holder is always the last to have rights to the company asset's.

The formula for FCFE is Net Income - (Capex - Depreciation) - (Working capital Changes) - (Debt payment) + (New Debt Issued). In my opinion, working capital is not that difficult to estimate as inventory control, day receivable terms, day payables terms shall be under well controlled by management. The trickiest part of all is the company future growth projection.

Hi kcchong, I don't think London Biscuit is selling at a lower valuation as compared to Apollo. Quite the contrary, I believe London Biscuit is selling at quite an expensive value compared to Apollo.

Yes, London Biscuit shows a fantastic growth in its sales, representing a CAGR of 18.99% since it was listed in 2001. During the same period of time, Apollo sales just grew at a CAGR of 6.83%. However, operating margin of London Biscuit was deteriorating from 25% in 2002 to just 11% in year 2013. On the other hand, Apollo able to maintain its operating margin in the range of 12% - 16% average.

Another thing worth to take note is the CAPEX / Sales of both company.

For London Biscuit:

2007 - 32.87%
2008 - 18.04%
2009 - 17.58%
2010 - 21.33%
2011 - 12.64%
2012 - 36.16%
2013 - 7.59%
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Average: 20.88%
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For Apollo:

2007 - 11.73%
2008 - 6.20%
2009 - 8.72%
2010 - 8.99%
2011 - 7.98%
2012 - 4.84%
2013 - 2.89%
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Average: 7.34%
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For some reasons London Biscuit just spend a lot more on capital expenditure.

For the valuation part of Apollo, with the assumption of 5% growth, operating margin 15%, terminal growth 3% and discount rate of 10%, it worth RM4.67 per share which I think the current price is quite fairly valued.

For London Biscuit - I got a negative value from my model......