Using the two-stage Free Cash Flow to Equity model, we estimate Kawan Food Berhad’s fair value at RM0.92. Currently, the share price is RM0.99, suggesting it’s trading near its fair value. Compared to the industry’s average discount of -29%, Kawan Food Berhad’s competitors seem to have a greater premium over their fair values.
A Discounted Cash Flow (DCF) model helps investors understand a company’s worth based on its future cash flows. It’s important to know that a DCF is just one way to estimate a company’s value. You can learn more about intrinsic value through the Simply Wall St analysis model.
Understanding the DCF Model
We will use a two-stage DCF model. The first stage involves higher growth, while the second stage represents a steady growth period. We start by estimating cash flows for the next ten years based on past data since no analyst estimates are available. Typically, if a company’s cash flow is declining, we expect its decline to slow. Conversely, for companies growing, growth rates often taper off as they mature.
Essentially, today’s dollar is worth more than a dollar tomorrow. Hence, we discount future cash flows to their present value to assess their worth.
Cash Flow Projections
Here is a simplified prediction for Kawan Food’s cash flows over the next ten years (in MYR millions):
- 2026: RM25.2m
- 2027: RM21.5m
- 2028: RM19.5m
- 2029: RM18.4m
- 2030: RM18.0m
- 2031: RM17.8m
- 2032: RM17.9m
- 2033: RM18.2m
- 2034: RM18.6m
- 2035: RM19.1m
Using a discount rate of 8.5%, we can present the future cash flows in today’s money. The total value of cash flows for the next ten years is approximately RM130 million.
Terminal Value
The terminal value represents cash flow beyond the initial ten years. We use the Gordon Growth model for this, estimating it at the growth rate of government bonds (3.7%):
- Terminal Value (TV) = FCF2035 × (1 + g) ÷ (r – g)
- Result: RM414 million.
Discounting this back to present value gives us RM183 million.
Total Equity Value
Combining the present value of cash flows and the terminal value provides a total equity value of around RM313 million. Dividing by the number of shares outstanding suggests that the company is close to fair value relative to its current share price of RM1.0.
Important Considerations
When using DCF, focus on the discount rate and cash flow assumptions as they significantly impact the outcome. Additionally, it’s vital to recognize that this model does not consider cyclical industry trends or future capital needs.
Investing requires assessing various factors. For Kawan Food Berhad, you should consider:
- Risks: There are potential warning signs worth reviewing.
- Future Earnings: Compare growth rates with its peers and the broader market.
- Other Solid Businesses: Look at businesses with low debt and good past performance.
A DCF model offers insights but should not be the sole metric for evaluating a company. Evolving variables like growth rates or costs of capital can alter the output significantly. For a deeper analysis, you might explore Kawan Food Berhad’s latest information and compare with similar firms.
Experts often emphasize that understanding the company’s context within the market is just as critical as numeric values in a DCF analysis. Keep this broad view in mind as you navigate your investment decisions.
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Free Cash Flow, Discounted Cash Flow, future cash flows, terminal value, Kawan, fair value
