Estimating The Fair Value Of B.I.G. Industries Berhad (KLSE:BIG)

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

Thu, Apr 11, 2024, 6:10 PM 6 min read

Key Insights

B.I.G. Industries Berhad's estimated fair value is RM0.68 based on 2 Stage Free Cash Flow to Equity
Current share price of RM0.70 suggests B.I.G. Industries Berhad is potentially trading close to its fair value
When compared to theindustry average discount of -77%, B.I.G. Industries Berhad's competitors seem to be trading at a greater premium to fair value

How far off is B.I.G. Industries Berhad (KLSE:BIG) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for B.I.G. Industries Berhad

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM2.44m	RM2.66m	RM2.84m	RM3.02m	RM3.18m	RM3.33m	RM3.47m	RM3.62m	RM3.76m	RM3.90m
Growth Rate Estimate Source	Est @ 10.83%	Est @ 8.64%	Est @ 7.11%	Est @ 6.04%	Est @ 5.29%	Est @ 4.76%	Est @ 4.40%	Est @ 4.14%	Est @ 3.96%	Est @ 3.83%
Present Value (MYR, Millions) Discounted @ 10.0%	RM2.2	RM2.2	RM2.1	RM2.1	RM2.0	RM1.9	RM1.8	RM1.7	RM1.6	RM1.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM19m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.5%. We discount the terminal cash flows to today's value at a cost of equity of 10.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM3.9m× (1 + 3.5%) ÷ (10.0%– 3.5%) = RM63m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM63m÷ ( 1 + 10.0%)¹⁰= RM24m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM43m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of RM0.7, 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:BIG Discounted Cash Flow April 12th 2024

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 B.I.G. Industries 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 10.0%, which is based on a levered beta of 1.015. 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.

Looking Ahead:

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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For B.I.G. Industries Berhad, there are three relevant items you should look at:

Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with B.I.G. Industries Berhad (at least 1 which is significant) , and understanding them should be part of your investment process.
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!
Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.