An Intrinsic Calculation For Spritzer Bhd (KLSE:SPRITZER) Suggests It's 28% Undervalued
Does the December share price for Spritzer Bhd (KLSE:SPRITZER) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Spritzer Bhd
Crunching the numbers
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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
|Levered FCF (MYR, Millions)||RM23.9m||RM27.8m||RM31.1m||RM34.2m||RM36.9m||RM39.3m||RM41.6m||RM43.7m||RM45.7m||RM47.8m|
|Growth Rate Estimate Source||Est @ 21.12%||Est @ 15.89%||Est @ 12.24%||Est @ 9.68%||Est @ 7.88%||Est @ 6.63%||Est @ 5.75%||Est @ 5.13%||Est @ 4.7%||Est @ 4.4%|
|Present Value (MYR, Millions) Discounted @ 9.3%||RM21.9||RM23.2||RM23.9||RM23.9||RM23.6||RM23.1||RM22.3||RM21.5||RM20.6||RM19.6|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM223m
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 (3.7%) 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 9.3%.
Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = RM48m× (1 + 3.7%) ÷ (9.3%– 3.7%) = RM886m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM886m÷ ( 1 + 9.3%)10= RM364m
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 RM587m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM2.0, the company appears a touch undervalued at a 28% discount to where the stock price trades currently. 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.
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 Spritzer Bhd 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 9.3%, 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.
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Spritzer Bhd, we've put together three essential elements you should further research:
- Risks: Be aware that Spritzer Bhd is showing 1 warning sign in our investment analysis , you should know about...
- Future Earnings: How does SPRITZER'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 High Quality Alternatives: Do you like a good all-rounder? 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 Malaysian stock every day, so if you want to find the intrinsic value of any other stock just search here.
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Spritzer Bhd, an investment holding company, manufactures and sells bottled water in Malaysia.
Excellent balance sheet with proven track record.