A Look At The Fair Value Of Heineken Malaysia Berhad (KLSE:HEIM)

Simply Wall St
6 min read
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In this article:

Key Insights

  • The projected fair value for Heineken Malaysia Berhad is RM22.71 based on 2 Stage Free Cash Flow to Equity

  • Current share price of RM26.66 suggests Heineken Malaysia Berhad is potentially trading close to its fair value

  • The RM31.40 analyst price target for HEIM is 38% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Heineken Malaysia Berhad (KLSE:HEIM) by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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. 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 Heineken Malaysia Berhad

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (MYR, Millions)

RM450.0m

RM475.4m

RM475.0m

RM493.0m

RM507.7m

RM523.7m

RM540.9m

RM559.1m

RM578.2m

RM598.3m

Growth Rate Estimate Source

Analyst x4

Analyst x3

Analyst x1

Analyst x1

Est @ 2.98%

Est @ 3.15%

Est @ 3.28%

Est @ 3.37%

Est @ 3.43%

Est @ 3.47%

Present Value (MYR, Millions) Discounted @ 10.0%

RM409

RM393

RM357

RM337

RM316

RM296

RM278

RM261

RM246

RM231

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM3.1b

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 (3.6%) 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 10.0%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = RM598m× (1 + 3.6%) ÷ (10.0%– 3.6%) = RM9.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM9.7b÷ ( 1 + 10.0%)10= RM3.7b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM6.9b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of RM26.7, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Heineken Malaysia 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 10.0%, 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.

SWOT Analysis for Heineken Malaysia Berhad

Strength

  • Earnings growth over the past year exceeded its 5-year average.

  • Currently debt free.

Weakness

  • Earnings growth over the past year underperformed the Beverage industry.

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

  • Expensive based on P/E ratio and estimated fair value.

Opportunity

  • Annual earnings are forecast to grow for the next 3 years.

Threat

  • Dividends are not covered by earnings and cashflows.

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

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Heineken Malaysia Berhad, there are three further items you should further research:

  1. Risks: We feel that you should assess the 1 warning sign for Heineken Malaysia Berhad we've flagged before making an investment in the company.

  2. Future Earnings: How does HEIM'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.

  3. 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. 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.

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

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.

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