Thai Beverage Public Company Limited (SGX: Y92), as the name might suggest, is a maker of alcoholic and non-alcoholic drinks in Thailand. Thai Beverage’s shares are selling at S$0.84 apiece right now. At that price, are the company’s shares cheap? One way to determine the company’s value would be to use the reverse discounted cash flow (DCF) valuation method.
Reverse DCF? What’s that?
A DCF model essentially sums up all the cash a company can produce over its lifetime before discounting them back to the present value.
The popular way to estimate that amount of cash would be to first determine how fast a company can grow its free cash flows over the next 10 years. This is followed by estimating how fast the company can grow its free cash flows from the 11th year onward to perpetuity; this is known as the terminal growth rate.
However, there are issues with using a DCF model.
For instance, investors need to estimate how much cash a company can produce – in essence, that’s trying to project future cash flows and the future can be hard to predict.
To counter some of those roadblocks, we can use a reverse DCF model instead. The reverse DCF model looks at a stock’s current price to determine the growth rate that the stock market is implying at that share price and whether it’s worth buying at that price.
Thai Beverage’s value
To produce a reverse DCF model for Thai Beverage, here are some of the data required:
- Thai Beverage’s current share price
- Thai Beverage’s free cash flow per share generated over the last 12 months
- A discount rate
- A terminal growth rate for Thai Beverage’s free cash flows
As mentioned earlier, Thai Beverage’s current share price is S$0.84. The company’s trailing free cash flow per share is S$0.042 (free cash flow of S$1.05 billion divided by a share count of 25.11 billion).
For the discount rate, we will use a required rate of return (also known as the hurdle rate), which is set at 10%. Do note that there’s another way to look at the discount rate, but we are keeping things simple here.
Coming to the terminal growth rate, we would simply set it as the historical rate of long-term inflation, which is around 2% to 3% for Singapore. We will use a conservative 2% here.
So, to sum up what we have at the moment:
- Thai Beverage’s current share price: S$0.84
- Thai Beverage’s free cash flow per share generated over the last 12 months: S$0.042
- Discount rate: 10%
- Terminal growth rate for Thai Beverage’s free cash flows: 2%
Using the figures above, our calculations show that the market expects Thai Beverage’s free cash flow per share to grow by around 8% annually over the next 10 years.
So, is Thai Beverage cheap?
We can then use the implied growth rates for Thai Beverage’s free cash flow growth and compare it with our own views on the company’s ability to grow.
If you think that the implied growth rates are too low for Thai Beverage, then the company would be a bargain at its current price of S$0.84. However, if you think the implied growth rates are too ambitious, then Thai Beverage could be an expensive stock right now.
In my opinion, Thai Beverage should be able to grow at more than 8% per annum for the next 10 years, provided its recent acquisitions contribute significantly to free cash flow.
One of the acquisitions was a 53.59% stake in Saigon Beer Alcohol Beverage Joint Stock Corp (Sabeco), which has the largest market share in Vietnam’s beer market. Thai Beverage also bought a 75% stake in Grand Royal Group, the biggest player in Myanmar’s whisky market. Furthermore, Thai Beverage acquired the rights as a franchisee to operate KFC restaurants in Thailand.
However, one thing investors should be mindful about is Thai Beverage’s level of borrowings. As of 31 March 2019, it had a gearing ratio of 1.63 times, which is on the high side.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.