Are Investors Underestimating Malaysia Marine and Heavy Engineering Holdings Berhad (KLSE: MHB) by 32%? | Jobs Vox

How far is Malaysia Marine & Heavy Engineering Holdings Berhad (KLSE: MHB) from its intrinsic value? Using the most recent financial data, we’ll see if the stock is fairly priced 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. Such models may appear beyond the comprehension of a layman, but they are quite easy to follow.

Companies can be valued in many different ways, so we would like to point out that DCF is not right for every situation. Anyone interested in learning a bit more about intrinsic value should read Simply Wall St’s Analysis Model.

Check out our latest analysis for Malaysia Marine & Heavy Engineering Holdings Berhad

Is Malaysia Marine & Heavy Engineering Holdings Berhad Fairly Valuable?

We are using a 2-stage growth model, which simply means we take into account two stages of company growth. The growth rate of the company may be high in the initial period and the second phase is generally considered to be a steady growth rate. To begin with, we need to get cash flow projections for the next ten years. We use analyst estimates where possible, but when these are not available we extrapolate past free cash flow (FCF) from previous estimates or reported prices. We believe that companies with decreasing free cash flow will slow their rate of contraction, and that companies with increasing free cash flow will see their rate of growth slow over this period. We do this to show that growth slows more in the early years than in the later years.

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

10 Year Free Cash Flow (FCF) Projection

(“estimate” = the FCF growth rate estimated by Simply Wall Street)
Present Value of 10 Year Cash Flows (PVCF) = RM883m

the story continues

Now we need to calculate the terminal value, which accounts for all 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 3.6%. We discount the terminal cash flows to today’s value at a cost of equity of 16%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = RM233m× (1 + 3.6%) ÷ (16% – 3.6%) = RM1.9b

Present Value of Terminal Value (PVTV)= TV / (1 + R)¹⁰= RM1.9b÷ (1 + 16%)¹⁰= RM442m

Net value is the sum of cash flows and discounted terminal value for the next ten years, resulting in a net equity value, which in this case is RM1.3b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.6, the company currently appears significantly undervalued at a 32% discount to the share price. The assumptions in any calculation have a big impact on the valuation, so it’s better to look at it as a rough estimate, not accurate down to the last percent.

key concepts

We would like to point out that the most important inputs for discounted cash flows are the discount rate and of course the real cash flows. You do not need to agree with these information, I recommend that you redo the calculations yourself and play with them. The DCF also doesn’t consider the potential cyclicality of an industry or a company’s future capital requirements, so it doesn’t give a complete picture of a company’s potential performance. Given that we are looking at Malaysia Marine and Heavy Engineering Holdings Berhad as potential shareholders, the cost of equity rather than the cost of capital (or weighted average cost of capital, WACC) is used as the discount rate , who is responsible for the debt. We’ve used 16% in this calculation, which is based on a leveraged beta of 1.743. Beta is a measure of a stock’s volatility in comparison to the market as a whole. We derive our beta from the industry average beta of globally comparable companies, which ranges between 0.8 and 2.0, which is a reasonable range for a stable business.

Next steps:

While 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. Rather it is “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 of return changes rapidly, the output may look very different. What is the reason for the share price to sit below the intrinsic value? For Malaysia Marine & Heavy Engineering Holdings Berhad, there are three essential aspects that you should pay attention to:

1. financial health: Does MHB have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors such as leverage and risk.

2. future earnings: How does MHB’s growth rate compare to its peers and the broader market? Dig deeper into the analyst consensus numbers for the years to come by interacting with our free analyst growth anticipation chart.

3. other concrete business: Low debt, high return 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 haven’t considered!

PS. Simply Wall Street updates its DCF calculation for every Malaysian stock every day, so if you want to find the intrinsic value of another stock, search here.

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

This article from Simply Wall St is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account 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 Street has no position in any of the stocks mentioned.

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