A look at the fair value of PLS ​​Plantations Berhad (KLSE:PLS)

Key findings

• Using the 2-step free cash flow to equity, the fair value estimate of PLS ​​Plantations Berhad is RM0.59

• With a share price of RM0.70, PLS Plantations Berhad appears to be trading close to its estimated fair value

• The industry average of 79% suggests that PLS Plantations Berhad’s competitors are currently trading at a higher premium to fair value

In this article, we will estimate the intrinsic value of PLS ​​Plantations Berhad (KLSE:PLS) by projecting its future cash flows and then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. There is actually not too much involved in it, even though it may seem quite complex.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. For those who enjoy stock analysis, the analysis model from Simply Wall St listed here might be of interest.

Check out our latest analysis for PLS Plantations Berhad

The method

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 may have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. In the first stage, we need to estimate the company’s cash flows for the next ten years. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last 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 down more in the early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today. Therefore, the sum of these future cash flows is discounted to today’s value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 102 million RM

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 (3.6%) 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 8.6%.

The story goes on

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM18m × (1 + 3.6%) ÷ (8.6% – 3.6%) = RM359m

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 359 million RM ÷ (1 + 8.6%)¹⁰= 157 million RM

The total value or equity value is then the sum of the present value of future cash flows, which in this case is RM259 million. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM0.7, the company appears to be roughly at fair value at the time of writing. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

Important assumptions

The key 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. DCF also doesn’t take into account the potential cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider PLS Plantations 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 takes debt into account. In this calculation, we used 8.6% which is based on a leveraged beta of 0.800. 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 a set limit between 0.8 and 2.0 which is a reasonable range for a stable company.

SWOT Analysis for PLS Plantations Berhad

Strength

weakness

Opportunity

Danger

Looking ahead:

Valuation is only one side of the coin in building your investment thesis, and just one of many factors you need to evaluate for a company. It’s not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company is growing at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome could be very different. For PLS Plantations Berhad, we’ve compiled three important factors you should examine in more detail:

1. Risks: Take risks, for example – PLS Plantations Berhad has 2 warning signs (and 1 that shouldn’t be ignored) that we think you should know about.

2. 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!

3. Other environmentally friendly companies: Are you concerned about the environment and believe that consumers will increasingly buy environmentally friendly products? Browse through our interactive list of companies thinking about a greener future and discover some stocks you may not have thought of yet!

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

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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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