Calculating The Fair Value Of Marine & General Berhad (KLSE:M&G)
The projected fair value for Marine & General Berhad is RM0.24 based on 2 Stage Free Cash Flow to Equity
Current share price of RM0.25 suggests Marine & General Berhad is potentially trading close to its fair value
When compared to theindustry average discount of -76%, Marine & General Berhad's competitors seem to be trading at a greater premium to fair value
How far off is Marine & General Berhad (KLSE:M&G) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
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. 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 Marine & General Berhad
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (MYR, Millions)
RM41.5m
RM31.6m
RM26.7m
RM24.1m
RM22.7m
RM22.0m
RM21.8m
RM21.9m
RM22.2m
RM22.7m
Growth Rate Estimate Source
Est @ -35.42%
Est @ -23.72%
Est @ -15.52%
Est @ -9.78%
Est @ -5.77%
Est @ -2.96%
Est @ -0.99%
Est @ 0.39%
Est @ 1.35%
Est @ 2.03%
Present Value (MYR, Millions) Discounted @ 15%
RM35.9
RM23.7
RM17.4
RM13.6
RM11.1
RM9.3
RM8.0
RM6.9
RM6.1
RM5.4
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM137m
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 15%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM23m× (1 + 3.6%) ÷ (15%– 3.6%) = RM198m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM198m÷ ( 1 + 15%)10= RM47m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM184m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM0.3, 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 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 Marine & General 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 15%, which is based on a levered beta of 2.000. 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.
Whilst important, the DCF calculation 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. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Marine & General Berhad, there are three additional factors you should assess:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Marine & General Berhad (at least 1 which is concerning) , and understanding them should be part of your investment process.
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!
Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!
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.
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