Calculating the intrinsic value of Thai Beverage Public Company Limited (SGX:Y92)

Key findings

• The forecast fair value for Thai Beverage is S$0.65 based on the 2-step free cash flow to equity

• Thai Beverage’s share price of S$0.58 suggests that the price is at a similar level to the estimated fair value.

• Our fair value estimate is 22% below Thai Beverage’s analyst price target of ฿0.83.

In this article, we will estimate the intrinsic value of Thai Beverage Public Company Limited (SGX:Y92) by taking the expected future cash flows and discounting them to today’s value. One way to do this is by applying the discounted cash flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

We would like to point out that there are many ways to value a company and that each method, like the DCF, has advantages and disadvantages in certain scenarios. If you still have questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Thai Beverage

The calculation

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to get estimates of the next ten years of cash flows. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, the sum of these future cash flows is discounted to today’s value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = ฿233b

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. For various reasons, a very conservative growth rate is used that cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way as with the 10-year “growth” period, we discount future cash flows to today’s value, using a cost of equity of 9.7%.

Final value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = ฿36b × (1 + 2.0%) ÷ (9.7% – 2.0%) = ฿471b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= ฿471b÷ ( 1 + 9.7 %)¹⁰= ฿187b

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is ฿420b. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.6, the company appears roughly fairly valued at an 11% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

The assumptions

We would like to point out that the main 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 repeating the calculations yourself and playing around with them. The DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Thai Beverage 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 9.7%, which is based on a leveraged beta of 0.887. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Thai Beverages

Strength

weakness

Opportunity

Danger

Looking ahead:

Although the DCF calculation is important, ideally it should not be the only analysis you look at for a company. The DCF model is not a perfect stock valuation tool. It should be viewed more as a guide to “what assumptions need to hold for this stock to be under/overvalued”. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Thai Beverage, we have compiled three relevant factors for you to consider:

1. Risks: For this purpose, you should be aware of the 2 warning signs We discovered something at Thai Beverage (including 1 that is important).

2. Future income: How does Y92’s growth rate compare to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.

3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for each Singapore stock daily, so if you want to find out the intrinsic value of any other stock, just search here.

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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