Are Investors Undervaluing Berjaya Food Berhad (KLSE:BJFOOD) By 35%?

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

Sat, Jan 13, 2024, 5:32 PM 6 min read

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Berjaya Food Berhad (KLSE:BJFOOD) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Berjaya Food 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. To start off with, we need to estimate 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM143.7m	RM158.9m	RM172.6m	RM183.7m	RM193.9m	RM203.5m	RM212.7m	RM221.7m	RM230.6m	RM239.6m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x2	Est @ 6.41%	Est @ 5.55%	Est @ 4.95%	Est @ 4.53%	Est @ 4.24%	Est @ 4.03%	Est @ 3.89%
Present Value (MYR, Millions) Discounted @ 14%	RM126	RM123	RM118	RM110	RM103	RM94.7	RM87.2	RM80.0	RM73.3	RM67.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM982m

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 (3.6%) 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 14%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM240m× (1 + 3.6%) ÷ (14%– 3.6%) = RM2.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM2.5b÷ ( 1 + 14%)¹⁰= RM691m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM1.7b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.6, the company appears quite good value at a 35% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf — KLSE:BJFOOD Discounted Cash Flow January 14th 2024

The Assumptions

Now the most important 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 redoing the calculations yourself and playing with them. 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 Berjaya Food 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 14%, which is based on a levered beta of 1.472. 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 Berjaya Food Berhad

Strength

Debt is not viewed as a risk.

Dividends are covered by earnings and cash flows.

Dividend is in the top 25% of dividend payers in the market.

Weakness

Earnings declined over the past year.

Opportunity

Annual revenue is forecast to grow faster than the Malaysian market.

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

Threat

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

Next Steps:

Whilst important, the DCF calculation 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. Can we work out why the company is trading at a discount to intrinsic value? For Berjaya Food Berhad, there are three important elements you should assess:

Risks: For example, we've discovered 2 warning signs for Berjaya Food Berhad that you should be aware of before investing here.
Future Earnings: How does BJFOOD'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.