An Intrinsic Calculation For P.I.E. Industrial Berhad (KLSE:PIE) Suggests It's 34% Undervalued

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

Key Insights

  • The projected fair value for P.I.E. Industrial Berhad is RM9.83 based on 2 Stage Free Cash Flow to Equity

  • P.I.E. Industrial Berhad is estimated to be 34% undervalued based on current share price of RM6.53

  • P.I.E. Industrial Berhad's peers are currently trading at a premium of 216% on average

Today we will run through one way of estimating the intrinsic value of P.I.E. Industrial Berhad (KLSE:PIE) by taking the expected future cash flows and discounting them to today's 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 generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for P.I.E. Industrial Berhad

Crunching The Numbers

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF (MYR, Millions)

RM65.9m

RM107.2m

RM155.4m

RM205.9m

RM255.0m

RM300.3m

RM340.8m

RM376.7m

RM408.4m

RM436.8m

Growth Rate Estimate Source

Est @ 88.09%

Est @ 62.73%

Est @ 44.97%

Est @ 32.55%

Est @ 23.85%

Est @ 17.76%

Est @ 13.50%

Est @ 10.51%

Est @ 8.42%

Est @ 6.96%

Present Value (MYR, Millions) Discounted @ 11%

RM59.6

RM87.7

RM115

RM138

RM155

RM165

RM169

RM169

RM166

RM161

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM1.4b

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. 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 11%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM437m× (1 + 3.6%) ÷ (11%– 3.6%) = RM6.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM6.5b÷ ( 1 + 11%)10= RM2.4b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM3.8b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM6.5, the company appears quite good value at a 34% 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.

dcf
dcf

Important 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 P.I.E. Industrial 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 1.096. 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 P.I.E. Industrial Berhad

Strength

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

Weakness

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

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

Opportunity

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

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

Threat

  • No apparent threats visible for PIE.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For P.I.E. Industrial Berhad, there are three essential elements you should explore:

  1. Risks: Be aware that P.I.E. Industrial Berhad is showing 1 warning sign in our investment analysis , you should know about...

  2. Future Earnings: How does PIE'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 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.

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