IJM Corporation Berhad's (KLSE:IJM) Intrinsic Value Is Potentially 92% Above Its Share Price

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

Mon, Oct 16, 2023, 10:19 PM 6 min read

Today we will run through one way of estimating the intrinsic value of IJM Corporation Berhad (KLSE:IJM) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for IJM Corporation Berhad

The Method

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. To begin with, we have to get estimates of the next ten years of cash flows. 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, 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)	RM503.5m	RM749.1m	RM989.3m	RM1.18b	RM1.34b	RM1.49b	RM1.62b	RM1.74b	RM1.85b	RM1.95b
Growth Rate Estimate Source	Analyst x3	Analyst x3	Analyst x3	Est @ 18.88%	Est @ 14.28%	Est @ 11.06%	Est @ 8.81%	Est @ 7.23%	Est @ 6.13%	Est @ 5.35%
Present Value (MYR, Millions) Discounted @ 13%	RM446	RM587	RM687	RM723	RM731	RM719	RM693	RM658	RM618	RM577

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM6.4b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 3.6%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM1.9b× (1 + 3.6%) ÷ (13%– 3.6%) = RM21b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM21b÷ ( 1 + 13%)¹⁰= RM6.4b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is RM13b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM1.9, the company appears quite undervalued at a 48% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf — KLSE:IJM Discounted Cash Flow October 17th 2023

Important 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 IJM Corporation 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 13%, which is based on a levered beta of 1.377. 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 IJM Corporation Berhad

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by earnings.

Weakness

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

Opportunity

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

Trading below our estimate of fair value by more than 20%.

Threat

Debt is not well covered by operating cash flow.

Dividends are not covered by earnings.

Revenue is forecast to grow slower than 20% per year.

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. Why is the intrinsic value higher than the current share price? For IJM Corporation Berhad, there are three further items you should further research:

Risks: For instance, we've identified 2 warning signs for IJM Corporation Berhad that you should be aware of.
Future Earnings: How does IJM'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.