Stock Analysis

Axiata Group Berhad's (KLSE:AXIATA) Intrinsic Value Is Potentially 69% Above Its Share Price

KLSE:AXIATA
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Key Insights

  • Axiata Group Berhad's estimated fair value is RM4.84 based on 2 Stage Free Cash Flow to Equity
  • Current share price of RM2.87 suggests Axiata Group Berhad is potentially 41% undervalued
  • The RM2.82 analyst price target for AXIATA is 42% less than our estimate of fair value

Today we will run through one way of estimating the intrinsic value of Axiata Group Berhad (KLSE:AXIATA) by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

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.

View our latest analysis for Axiata Group Berhad

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 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (MYR, Millions) RM3.13b RM3.12b RM3.67b RM2.64b RM2.61b RM2.62b RM2.66b RM2.71b RM2.78b RM2.85b
Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x3 Analyst x1 Est @ -1.00% Est @ 0.37% Est @ 1.32% Est @ 1.99% Est @ 2.46% Est @ 2.79%
Present Value (MYR, Millions) Discounted @ 8.6% RM2.9k RM2.6k RM2.9k RM1.9k RM1.7k RM1.6k RM1.5k RM1.4k RM1.3k RM1.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM19b

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 8.6%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = RM2.9b× (1 + 3.6%) ÷ (8.6%– 3.6%) = RM58b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM58b÷ ( 1 + 8.6%)10= RM25b

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 RM44b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of RM2.9, the company appears quite undervalued at a 41% 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.

dcf
KLSE:AXIATA Discounted Cash Flow May 27th 2024

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Axiata Group 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 8.6%, 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 Axiata Group Berhad

Strength
  • Debt is well covered by cash flow.
Weakness
  • Interest payments on debt are not well covered.
  • Dividend is low compared to the top 25% of dividend payers in the Wireless Telecom market.
Opportunity
  • Expected to breakeven next year.
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Good value based on P/S ratio and estimated fair value.
Threat
  • Dividends are not covered by cash flow.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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. 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. What is the reason for the share price sitting below the intrinsic value? For Axiata Group Berhad, there are three relevant aspects you should further examine:

  1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with Axiata Group Berhad .
  2. Future Earnings: How does AXIATA'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.
  3. 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KLSE 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 Axiata Group Berhad 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.

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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.