Key Insights
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The projected fair value for Maxis Berhad is RM6.54 based on 2 Stage Free Cash Flow to Equity
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Maxis Berhad's RM3.81 share price signals that it might be 42% undervalued
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Analyst price target for MAXIS is RM4.06 which is 38% below our fair value estimate
In this article we are going to estimate the intrinsic value of Maxis Berhad ( KLSE:MAXIS ) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model .
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 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.
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
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (MYR, Millions) |
RM2.21b |
RM2.43b |
RM2.58b |
RM2.70b |
RM2.82b |
RM2.94b |
RM3.06b |
RM3.18b |
RM3.31b |
RM3.44b |
| Growth Rate Estimate Source |
Analyst x6 |
Analyst x4 |
Analyst x1 |
Est @ 4.82% |
Est @ 4.48% |
Est @ 4.25% |
Est @ 4.09% |
Est @ 3.98% |
Est @ 3.90% |
Est @ 3.84% |
| Present Value (MYR, Millions) Discounted @ 8.5% |
RM2.0k |
RM2.1k |
RM2.0k |
RM1.9k |
RM1.9k |
RM1.8k |
RM1.7k |
RM1.7k |
RM1.6k |
RM1.5k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= RM18b
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 3.7%. We discount the terminal cash flows to today's value at a cost of equity of 8.5%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = RM3.4b× (1 + 3.7%) ÷ (8.5%– 3.7%) = RM74b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM74b÷ ( 1 + 8.5%)10= RM33b
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 RM51b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of RM3.8, the company appears quite undervalued at a 42% 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.
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. 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 Maxis 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 8.5%, which is based on a levered beta of 0.800. 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.
Check out our latest analysis for Maxis Berhad
SWOT Analysis for Maxis Berhad
Strength
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Earnings growth over the past year exceeded the industry.
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Debt is well covered by earnings and cashflows.
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Dividends are covered by earnings and cash flows.
Weakness
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Dividend is low compared to the top 25% of dividend payers in the Wireless Telecom market.
Opportunity
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Annual earnings are forecast to grow for the next 4 years.
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Trading below our estimate of fair value by more than 20%.
Threat
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Annual earnings are forecast to grow slower than the Malaysian market.
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Maxis Berhad, we've compiled three pertinent factors you should further examine:
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Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Maxis Berhad , and understanding these should be part of your investment process.
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Future Earnings: How does MAXIS'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 .
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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. 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.
