Stock Analysis

# Calculating The Intrinsic Value Of Maxis Berhad (KLSE:MAXIS)

Does the January share price for Maxis Berhad (KLSE:MAXIS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Maxis Berhad

## Is Maxis Berhad Fairly Valued?

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 start off with, we need to estimate 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) RM2.08b RM2.17b RM2.47b RM2.13b RM2.18b RM2.18b RM2.21b RM2.25b RM2.30b RM2.37b Growth Rate Estimate Source Analyst x7 Analyst x7 Analyst x2 Analyst x1 Analyst x1 Est @ 0.12% Est @ 1.15% Est @ 1.87% Est @ 2.37% Est @ 2.73% Present Value (MYR, Millions) Discounted @ 9.7% RM1.9k RM1.8k RM1.9k RM1.5k RM1.4k RM1.3k RM1.2k RM1.1k RM1.0k RM937

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM14b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (3.6%) 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 9.7%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = RM2.4b× (1 + 3.6%) ÷ (9.7%– 3.6%) = RM40b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM40b÷ ( 1 + 9.7%)10= RM16b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM30b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of RM4.1, the company appears around fair value 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.

## The 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. 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 Maxis 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 9.7%, 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 Maxis Berhad

Strength
• Debt is well covered by earnings and cashflows.
• Dividend is in the top 25% of dividend payers in the market.
Weakness
• Earnings declined over the past year.
• Expensive based on P/E ratio and estimated fair value.
Opportunity
• Annual earnings are forecast to grow for the next 4 years.
Threat
• Dividends are not covered by earnings and cashflows.
• Annual earnings are forecast to grow slower than the Malaysian market.

## Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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. For Maxis Berhad, we've compiled three essential elements you should explore:

1. Risks: For example, we've discovered 2 warning signs for Maxis Berhad (1 is a bit concerning!) that you should be aware of before investing here.
2. Future Earnings: How does MAXIS'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 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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