Calculating The Intrinsic Value Of UEM Edgenta Berhad (KLSE:EDGENTA)

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editorial-team@simplywallst.com (Simply Wall St)

Sun, Apr 28, 2024, 7:07 PM 6 min read

Key Insights

UEM Edgenta Berhad's estimated fair value is RM0.81 based on 2 Stage Free Cash Flow to Equity
Current share price of RM0.91 suggests UEM Edgenta Berhad is potentially trading close to its fair value
When compared to theindustry average discount of -178%, UEM Edgenta Berhad's competitors seem to be trading at a greater premium to fair value

Does the April share price for UEM Edgenta Berhad (KLSE:EDGENTA) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for UEM Edgenta Berhad

The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM25.0m	RM26.0m	RM62.0m	RM73.0m	RM76.0m	RM78.8m	RM81.6m	RM84.6m	RM87.6m	RM90.7m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Analyst x1	Analyst x1	Est @ 3.65%	Est @ 3.62%	Est @ 3.59%	Est @ 3.58%	Est @ 3.57%
Present Value (MYR, Millions) Discounted @ 12%	RM22.3	RM20.6	RM43.8	RM45.9	RM42.5	RM39.2	RM36.2	RM33.4	RM30.8	RM28.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM343m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (3.5%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM91m× (1 + 3.5%) ÷ (12%– 3.5%) = RM1.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM1.1b÷ ( 1 + 12%)¹⁰= RM334m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM677m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of RM0.9, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — KLSE:EDGENTA Discounted Cash Flow April 29th 2024

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 UEM Edgenta 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 12%, which is based on a levered beta of 1.383. 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.

SWOT Analysis for UEM Edgenta Berhad

Strength

Debt is well covered by earnings.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Construction market.

Expensive based on P/E ratio and estimated fair value.

Opportunity

Annual earnings are forecast to grow faster than the Malaysian market.

Threat

Debt is not well covered by operating cash flow.

Paying a dividend but company has no free cash flows.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For UEM Edgenta Berhad, we've put together three essential factors you should assess:

Risks: You should be aware of the 2 warning signs for UEM Edgenta Berhad we've uncovered before considering an investment in the company.
Future Earnings: How does EDGENTA's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

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

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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.