Estimating The Fair Value Of Kawan Food Berhad (KLSE:KAWAN)

Yahoo

29-05-2025

Kawan Food Berhad's estimated fair value is RM1.58 based on 2 Stage Free Cash Flow to Equity
Kawan Food Berhad's RM1.30 share price indicates it is trading at similar levels as its fair value estimate
Kawan Food Berhad's peers are currently trading at a premium of 148% on average
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Kawan Food Berhad (KLSE:KAWAN) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
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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. 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:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (MYR, Millions)
RM31.3m
RM30.2m
RM29.7m
RM29.7m
RM30.0m
RM30.6m
RM31.3m
RM32.2m
RM33.2m
RM34.2m
Growth Rate Estimate Source
Est @ -6.93%
Est @ -3.76%
Est @ -1.54%
Est @ 0.01%
Est @ 1.10%
Est @ 1.86%
Est @ 2.40%
Est @ 2.77%
Est @ 3.03%
Est @ 3.21%
Present Value (MYR, Millions) Discounted @ 8.4%
RM28.9
RM25.7
RM23.3
RM21.5
RM20.1
RM18.9
RM17.8
RM16.9
RM16.1
RM15.3
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM204m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 8.4%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM34m× (1 + 3.6%) ÷ (8.4%– 3.6%) = RM748m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM748m÷ ( 1 + 8.4%)10= RM334m
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 RM539m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of RM1.3, the company appears about fair value at a 18% 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.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Kawan Food 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 8.4%, 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.
View our latest analysis for Kawan Food Berhad
Strength
Debt is not viewed as a risk.
Dividend is in the top 25% of dividend payers in the market.
Weakness
Earnings declined over the past year.
Opportunity
Annual earnings are forecast to grow faster than the Malaysian market.
Current share price is below our estimate of fair value.
Threat
Dividends are not covered by earnings and cashflows.
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. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Kawan Food Berhad, there are three fundamental items you should further examine:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Kawan Food Berhad , and understanding this should be part of your investment process.
Future Earnings: How does KAWAN'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. 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.
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.