Key Insights
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Using the 2 Stage Free Cash Flow to Equity, Crescendo Corporation Berhad fair value estimate is RM1.58
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With RM1.28 share price, Crescendo Corporation Berhad appears to be trading close to its estimated fair value
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Peers of Crescendo Corporation Berhad are currently trading on average at a 183% premium
Does the September share price for Crescendo Corporation Berhad ( KLSE:CRESNDO ) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present 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.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model .
Crunching The Numbers
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of 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, 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
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (MYR, Millions) |
RM129.5m |
RM120.1m |
RM115.4m |
RM113.5m |
RM113.4m |
RM114.6m |
RM116.7m |
RM119.5m |
RM122.8m |
RM126.5m |
| Growth Rate Estimate Source |
Est @ -11.88% |
Est @ -7.22% |
Est @ -3.95% |
Est @ -1.66% |
Est @ -0.06% |
Est @ 1.06% |
Est @ 1.84% |
Est @ 2.39% |
Est @ 2.77% |
Est @ 3.04% |
| Present Value (MYR, Millions) Discounted @ 11% |
RM117 |
RM97.5 |
RM84.4 |
RM74.8 |
RM67.3 |
RM61.3 |
RM56.2 |
RM51.9 |
RM48.0 |
RM44.6 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= RM703m
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. 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 (3.7%) 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 11%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = RM127m× (1 + 3.7%) ÷ (11%– 3.7%) = RM1.8b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM1.8b÷ ( 1 + 11%)10= RM631m
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 RM1.3b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of RM1.3, the company appears about fair value at a 19% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Crescendo 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 11%, which is based on a levered beta of 1.224. 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.
View our latest analysis for Crescendo Corporation Berhad
SWOT Analysis for Crescendo Corporation Berhad
Strength
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Debt is not viewed as a risk.
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Dividends are covered by earnings and cash flows.
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Dividend is in the top 25% of dividend payers in the market.
Weakness
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Earnings declined over the past year.
Opportunity
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Current share price is below our estimate of fair value.
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Lack of analyst coverage makes it difficult to determine CRESNDO's earnings prospects.
Threat
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No apparent threats visible for CRESNDO.
Moving On:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Crescendo Corporation Berhad, we've put together three further aspects you should further examine:
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Risks: Take risks, for example - Crescendo Corporation Berhad has 1 warning sign we think you should be aware of.
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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!
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Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the KLSE every day. If you want to find the calculation for other stocks 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.
