Are investors undervaluing Maxis Berhad (KLSE:MAXIS) by 43%?
Today we are going to do a simple overview of a valuation method used to estimate the attractiveness of Maxis Berhad (KLSE:MAXIS) as an investment opportunity by taking expected future cash flows of the company and discounting them to the current value. This will be done using the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
See our latest review for Maxis Berhad
What is the estimated valuation?
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
Estimated free cash flow (FCF) over 10 years
|Leveraged FCF (MYR, Millions)||RM2.10b||RM2.18b||RM2.21b||RM2.25b||RM2.30b||RM2.37b||RM2.44b||RM2.52b||RM2.60b||RM2.69b|
|Growth rate estimate Source||Analyst x7||Analyst x7||Is at 1.29%||Is 1.97%||Is at 2.44%||Is at 2.77%||Is at 3.01%||Is at 3.17%||Is at 3.28%||Is at 3.36%|
|Present value (MYR, millions) discounted at 7.9%||RM1.9k||RM1.9k||RM1.8k||RM1.7k||RM1.6k||RM1.5k||RM1.4k||RM1.4k||RM1.3k||RM1.3k|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = RM16b
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 3.6%. We discount the terminal cash flows to their present value at a cost of equity of 7.9%.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = RM2.7b × (1 + 3.6%) ÷ (7.9%–3.6%) = RM64b
Present value of terminal value (PVTV)= TV / (1 + r)ten= RM64b÷ ( 1 + 7.9%)ten= RM30b
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is RM46b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of RM3.3, the company looks quite undervalued at a 43% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider 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 takes debt into account. In this calculation, we used 7.9%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While a business valuation is important, it shouldn’t be the only metric to consider when researching a business. DCF models are not the be-all and end-all of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Can we understand why the company is trading at a discount to its intrinsic value? For Maxis Berhad, we’ve put together three fundamentals you should consider:
- Risks: For example, we spotted 2 warning signs for Maxis Berhad you should be aware.
- Future earnings: How does MAXIS’ growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. Simply Wall St updates its DCF calculation for every Malaysian stock daily, so if you want to find the intrinsic value of any other stock, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.