The projected fair value for Carlsberg Brewery Malaysia Berhad is RM22.20 based on 2 Stage Free Cash Flow to Equity
With RM19.88 share price, Carlsberg Brewery Malaysia Berhad appears to be trading close to its estimated fair value
The RM24.32 analyst price target for CARLSBG is 9.6% more than our estimate of fair value
Does the November share price for Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. 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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
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. 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
Levered FCF (MYR, Millions)
Growth Rate Estimate Source
Est @ 4.68%
Est @ 4.34%
Est @ 4.11%
Est @ 3.94%
Est @ 3.82%
Est @ 3.74%
Est @ 3.68%
Est @ 3.64%
Present Value (MYR, Millions) Discounted @ 9.0%
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM2.7b
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) = RM510m× (1 + 3.6%) ÷ (9.0%– 3.6%) = RM9.7b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM9.7b÷ ( 1 + 9.0%)10= RM4.1b
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 RM6.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM19.9, the company appears about fair value at a 10% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
We would point out that 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 Carlsberg Brewery Malaysia 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 Carlsberg Brewery Malaysia Berhad
Debt is not viewed as a risk.
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Beverage market.
Annual revenue is forecast to grow faster than the Malaysian market.
Current share price is below our estimate of fair value.
Dividends are not covered by cash flow.
Annual earnings are forecast to grow slower than the Malaysian market.
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Carlsberg Brewery Malaysia Berhad, we've compiled three additional elements you should further examine:
Risks: Every company has them, and we've spotted 2 warning signs for Carlsberg Brewery Malaysia Berhad (of which 1 can't be ignored!) you should know about.
Future Earnings: How does CARLSBG'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.