- Berjaya Land Berhad's estimated fair value is RM0.35 based on 2 Stage Free Cash Flow to Equity
- Current share price of RM0.30 suggests Berjaya Land Berhad is potentially trading close to its fair value
- Industry average discount to fair value of 21% suggests Berjaya Land Berhad's peers are currently trading at a higher discount
In this article we are going to estimate the intrinsic value of Berjaya Land Berhad (KLSE:BJLAND) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing 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.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 (MYR, Millions)||RM215.0m||RM230.8m||RM245.1m||RM258.4m||RM271.0m||RM283.0m||RM294.9m||RM306.7m||RM318.5m||RM330.5m|
|Growth Rate Estimate Source||Est @ 8.98%||Est @ 7.35%||Est @ 6.21%||Est @ 5.41%||Est @ 4.85%||Est @ 4.46%||Est @ 4.19%||Est @ 4.00%||Est @ 3.86%||Est @ 3.77%|
|Present Value (MYR, Millions) Discounted @ 17%||RM183||RM168||RM152||RM137||RM123||RM109||RM97.2||RM86.2||RM76.4||RM67.7|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM1.2b
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 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 17%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = RM331m× (1 + 3.6%) ÷ (17%– 3.6%) = RM2.5b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM2.5b÷ ( 1 + 17%)10= RM514m
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 RM1.7b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.3, the company appears about fair value at a 14% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Berjaya Land 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 17%, which is based on a levered beta of 2.000. 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 Berjaya Land Berhad
- Debt is well covered by earnings.
- No major weaknesses identified for BJLAND.
- Current share price is below our estimate of fair value.
- Lack of analyst coverage makes it difficult to determine BJLAND's earnings prospects.
- Debt is not well covered by operating cash flow.
Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. For Berjaya Land Berhad, there are three relevant elements you should further examine:
- Risks: Every company has them, and we've spotted 1 warning sign for Berjaya Land Berhad you should know about.
- 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!
- Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
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.