Axiata Group Berhad, a telecommunications company based in Malaysia, has attracted attention with its potential intrinsic value being 79% above its current share price. In this article, we will delve into the details of how the company’s intrinsic value was estimated using the Discounted Cash Flow (DCF) model.
The DCF model calculates the present value of expected future cash flows by discounting them to today’s value. By doing so, it provides insight into what a company’s stock may actually be worth. Although the DCF model is not flawless, it is widely used to estimate the intrinsic value of a business.
Using a 2-stage model, the first stage assumes higher growth rates for the company’s cash flows, followed by a lower growth phase. Analyst estimates are typically used to determine the cash flows for the next ten years. If these estimates are not available, the previous free cash flow (FCF) is extrapolated. The model also considers the fact that companies with shrinking free cash flow may slow their rate of decline, while those with growing free cash flow may experience a slower growth rate.
Discounting future cash flows to their estimated value in today’s dollars is an important step in the DCF process. This is based on the belief that a dollar today is more valuable than a dollar in the future. The present value of the ten-year cash flow for Axiata Group Berhad was calculated to be RM23 billion.
Next, the Terminal Value was determined, taking into account all future cash flows beyond the initial ten-year period. To be conservative, a growth rate was used that could not exceed the country’s GDP growth rate. In this case, the 5-year average of the 10-year government bond yield was employed to estimate future growth, resulting in a rate of 3.6%. The future cash flows were then discounted to today’s value using a cost of equity of 10%.
The total equity value, or the sum of the present value of future cash flows, was calculated to be RM43 billion. To determine the intrinsic value per share, this value was divided by the total number of shares outstanding. In comparison to the current share price of RM2.6, the company appears to be undervalued by 44%.
It is crucial to note that a DCF model is just one method of valuation and should not be the sole factor in determining a company’s worth. Other factors such as industry cyclicality and future capital requirements should also be considered. Nevertheless, the DCF model can be useful in testing assumptions and theories, potentially revealing if a stock is undervalued or overvalued.
In conclusion, Axiata Group Berhad’s intrinsic value has been estimated to be significantly higher than its current share price. Investors should carefully assess the factors mentioned in this article and conduct their own analysis before making any investment decisions. Keep in mind that valuations are imprecise and can vary depending on assumptions and market conditions.
