Is There An Opportunity With Carlsberg Brewery Malaysia Berhad's (KLSE:CARLSBG) 30% Undervaluation?
Key Insights
- The projected fair value for Carlsberg Brewery Malaysia Berhad is RM25.52 based on 2 Stage Free Cash Flow to Equity
- Current share price of RM17.86 suggests Carlsberg Brewery Malaysia Berhad is potentially 30% undervalued
- The RM23.24 analyst price target for CARLSBG is 9.0% less than our estimate of fair value
How far off is Carlsberg Brewery Malaysia Berhad (KLSE:CARLSBG) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
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 Carlsberg Brewery Malaysia Berhad
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. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (MYR, Millions) | RM344.9m | RM359.3m | RM372.7m | RM386.3m | RM400.3m | RM414.8m | RM429.7m | RM445.0m | RM460.9m | RM477.3m |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Est @ 3.71% | Est @ 3.66% | Est @ 3.63% | Est @ 3.60% | Est @ 3.59% | Est @ 3.58% | Est @ 3.57% | Est @ 3.56% |
Present Value (MYR, Millions) Discounted @ 8.0% | RM319 | RM308 | RM296 | RM284 | RM272 | RM261 | RM250 | RM240 | RM230 | RM221 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM2.7b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 8.0%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM477m× (1 + 3.6%) ÷ (8.0%– 3.6%) = RM11b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM11b÷ ( 1 + 8.0%)10= RM5.1b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM7.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM17.9, the company appears quite undervalued at a 30% 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.
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 8.0%, 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.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings growth over the past year underperformed the Beverage industry.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Dividends are not covered by cash flow.
- Annual earnings are forecast to grow slower than the Malaysian market.
Next Steps:
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. 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. Why is the intrinsic value higher than the current share price? For Carlsberg Brewery Malaysia Berhad, we've put together three additional factors you should look at:
- Risks: For example, we've discovered 2 warning signs for Carlsberg Brewery Malaysia Berhad (1 doesn't sit too well with us!) that you should be aware of before investing here.
- 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
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.
Very undervalued with excellent balance sheet and pays a dividend.