Calculating The Fair Value Of Budweiser Brewing Company APAC Limited (HKG:1876)
- Budweiser Brewing Company APAC's estimated fair value is HK$27.22 based on 2 Stage Free Cash Flow to Equity
- With HK$23.55 share price, Budweiser Brewing Company APAC appears to be trading close to its estimated fair value
- Our fair value estimate is 3.3% higher than Budweiser Brewing Company APAC's analyst price target of US$28.13
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Budweiser Brewing Company APAC Limited (HKG:1876) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Budweiser Brewing Company APAC
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
|Levered FCF ($, Millions)||US$1.39b||US$1.78b||US$1.99b||US$2.14b||US$2.26b||US$2.36b||US$2.45b||US$2.53b||US$2.60b||US$2.66b|
|Growth Rate Estimate Source||Analyst x5||Analyst x5||Analyst x4||Est @ 7.55%||Est @ 5.81%||Est @ 4.59%||Est @ 3.73%||Est @ 3.14%||Est @ 2.72%||Est @ 2.42%|
|Present Value ($, Millions) Discounted @ 6.5%||US$1.3k||US$1.6k||US$1.6k||US$1.7k||US$1.7k||US$1.6k||US$1.6k||US$1.5k||US$1.5k||US$1.4k|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$15b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.7%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.5%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$2.7b× (1 + 1.7%) ÷ (6.5%– 1.7%) = US$57b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$57b÷ ( 1 + 6.5%)10= US$30b
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 US$46b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of HK$23.6, the company appears about fair value at a 13% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Budweiser Brewing Company APAC 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 6.5%, 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 Budweiser Brewing Company APAC
- 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 earnings are forecast to grow for the next 3 years.
- Current share price is below our estimate of fair value.
- Annual earnings are forecast to grow slower than the Hong Kong market.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Budweiser Brewing Company APAC, we've put together three fundamental elements you should further research:
- Financial Health: Does 1876 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.
- Future Earnings: How does 1876'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Budweiser Brewing Company APAC is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Budweiser Brewing Company APAC
Budweiser Brewing Company APAC Limited, an investment holding company, produces, imports, markets, distributes, and sells beer and other non-beer beverages primarily in China, South Korea, India, Vietnam, and the other Asia Pacific regions.
Excellent balance sheet with acceptable track record.