Are Thai Beverage Public Company Limited (SGX:Y92) Investors Paying Above The Intrinsic Value?

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Today we’ll do a simple run through of a valuation method used to estimate the attractiveness of Thai Beverage Public Company Limited (SGX:Y92) as an investment opportunity by taking the expected future cash flows and discounting them to today’s value. I will be using the Discounted Cash Flow (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward.

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.

See our latest analysis for Thai Beverage

Is Thai Beverage fairly valued?

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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Levered FCF (฿, Millions) ฿18.32k ฿27.86k ฿27.21k ฿23.86k ฿21.84k ฿20.69k ฿20.07k ฿19.79k ฿19.74k ฿19.83k
Growth Rate Estimate Source Analyst x6 Analyst x7 Analyst x6 Analyst x1 Est @ -8.48% Est @ -5.25% Est @ -2.98% Est @ -1.4% Est @ -0.29% Est @ 0.49%
Present Value (฿, Millions) Discounted @ 7.35% ฿17.07k ฿24.18k ฿21.99k ฿17.97k ฿15.32k ฿13.52k ฿12.22k ฿11.22k ฿10.42k ฿9.76k

Present Value of 10-year Cash Flow (PVCF)= ฿153.66b

“Est” = FCF growth rate estimated by Simply Wall St

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 2.3%. We discount the terminal cash flows to today’s value at a cost of equity of 7.4%.

Terminal Value (TV) = FCF2029 × (1 + g) ÷ (r – g) = ฿20b × (1 + 2.3%) ÷ (7.4% – 2.3%) = ฿402b

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = ฿฿402b ÷ ( 1 + 7.4%)10 = ฿197.74b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is ฿351.40b. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value estimate in the company’s reported currency of ฿13.99. However, Y92’s primary listing is in Thailand, and 1 share of Y92 in THB represents 0.0439 ( THB/ SGD) share of SGX:Y92, so the intrinsic value per share in SGD is SGD0.61. Relative to the current share price of SGD0.81, the company appears reasonably expensive at the time of writing. 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.

SGX:Y92 Intrinsic value, June 21st 2019
SGX:Y92 Intrinsic value, June 21st 2019

Important assumptions

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 Thai Beverage 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 7.4%, which is based on a levered beta of 0.847. 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.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. What is the reason for the share price to differ from the intrinsic value? For Thai Beverage, I’ve put together three additional factors you should further research:

  1. Financial Health: Does Y92 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does Y92’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.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of Y92? 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 SG stock every day, so if you want to find the intrinsic value of any other stock just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.