A Look At The Intrinsic Value Of Star Media Group Berhad (KLSE:STAR)

Key Insights

• The projected fair value for Star Media Group Berhad is RM0.51 based on 2 Stage Free Cash Flow to Equity

• Star Media Group Berhad's RM0.42 share price indicates it is trading at similar levels as its fair value estimate

• The RM0.40 analyst price target for STAR is 21% less than our estimate of fair value

Today we will run through one way of estimating the intrinsic value of Star Media Group Berhad (KLSE:STAR) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Star Media Group 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (MYR, Millions)	RM9.58m	RM13.1m	RM16.5m	RM19.8m	RM22.7m	RM25.3m	RM27.6m	RM29.6m	RM31.5m	RM33.2m
Growth Rate Estimate Source	Est @ 50.39%	Est @ 36.34%	Est @ 26.50%	Est @ 19.62%	Est @ 14.80%	Est @ 11.42%	Est @ 9.06%	Est @ 7.41%	Est @ 6.25%	Est @ 5.44%
Present Value (MYR, Millions) Discounted @ 9.5%	RM8.8	RM10.9	RM12.6	RM13.8	RM14.4	RM14.7	RM14.6	RM14.4	RM14.0	RM13.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = RM132m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 9.5%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = RM33m× (1 + 3.6%) ÷ (9.5%– 3.6%) = RM581m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM581m÷ ( 1 + 9.5%)¹⁰= RM235m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM367m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM0.4, the company appears about fair value at a 16% 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.

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 Star Media Group 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 9.5%, which is based on a levered beta of 0.866. 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 Star Media Group Berhad

Strength

• Currently debt free.

Weakness

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

Opportunity

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

• Current share price is below our estimate of fair value.

Threat

• Dividends are not covered by earnings and cashflows.

• Annual revenue is forecast to grow slower than the Malaysian market.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 Star Media Group Berhad, we've compiled three pertinent items you should further examine:

1. Risks: Be aware that Star Media Group Berhad is showing 2 warning signs in our investment analysis , and 1 of those is significant...

2. Future Earnings: How does STAR'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. Simply Wall St updates its DCF calculation for every Malaysian stock every day, so if you want to find the intrinsic value of any other stock 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.