Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) Shares Could Be 30% Above Their Intrinsic Value Estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Carlsberg Brewery Malaysia Berhad
Step By Step Through The Calculation
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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (MYR, Millions) | RM377.6m | RM399.5m | RM404.2m | RM411.9m | RM421.8m | RM433.4m | RM446.4m | RM460.6m | RM475.7m | RM491.8m |
Growth Rate Estimate Source | Analyst x3 | Analyst x3 | Est @ 1.19% | Est @ 1.90% | Est @ 2.40% | Est @ 2.75% | Est @ 3.00% | Est @ 3.17% | Est @ 3.29% | Est @ 3.37% |
Present Value (MYR, Millions) Discounted @ 10.0% | RM343 | RM330 | RM304 | RM282 | RM262 | RM245 | RM229 | RM215 | RM202 | RM190 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM2.6b
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 10.0%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = RM492m× (1 + 3.6%) ÷ (10.0%– 3.6%) = RM7.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM7.9b÷ ( 1 + 10.0%)10= RM3.1b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM5.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM24.2, 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.
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. 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 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 10.0%, 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
- Earnings growth over the past year exceeded its 5-year average.
- Debt is not viewed as a risk.
- Earnings growth over the past year underperformed the Beverage industry.
- Dividend is low compared to the top 25% of dividend payers in the Beverage market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow for the next 3 years.
- Dividends are not covered by earnings.
- Annual earnings are forecast to grow slower than the Malaysian market.
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Carlsberg Brewery Malaysia Berhad, we've compiled three essential elements you should further research:
- Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Carlsberg Brewery Malaysia Berhad , and understanding this should be part of your investment process.
- 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 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. 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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About KLSE:CARLSBG
Carlsberg Brewery Malaysia Berhad
Produces, distributes, and markets beer, stout, cider, shandy, liquor, and non-alcoholic beverages in Malaysia, Singapore, and internationally.
Solid track record with excellent balance sheet.