Australia's Jobs Data Contains Seeds Of Looming Weakness
SYDNEY—Australia's unemployment rate remained around its lowest levels in half a century in May, but the latest data contained some hints that the job market could slow in the coming months.
Unemployment remained steady at 4.1% in May, but the economy shed 2,500 jobs, well short of the 20,000 increase expected by economists.
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Washington Post
41 minutes ago
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Is There An Opportunity With Ansell Limited's (ASX:ANN) 42% Undervaluation?
The projected fair value for Ansell is AU$52.53 based on 2 Stage Free Cash Flow to Equity Current share price of AU$30.54 suggests Ansell is potentially 42% undervalued Our fair value estimate is 45% higher than Ansell's analyst price target of US$36.17 Today we will run through one way of estimating the intrinsic value of Ansell Limited (ASX:ANN) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) US$163.9m US$220.1m US$235.6m US$247.5m US$258.4m US$268.6m US$278.5m US$288.1m US$297.6m US$307.1m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x4 Est @ 5.04% Est @ 4.41% Est @ 3.97% Est @ 3.67% Est @ 3.45% Est @ 3.30% Est @ 3.20% Present Value ($, Millions) Discounted @ 7.6% US$152 US$190 US$189 US$184 US$179 US$173 US$166 US$160 US$154 US$147 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$1.7b The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.6%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$307m× (1 + 2.9%) ÷ (7.6%– 2.9%) = US$6.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$6.8b÷ ( 1 + 7.6%)10= US$3.2b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$4.9b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$30.5, the company appears quite good value at a 42% 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. 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 Ansell 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 7.6%, which is based on a levered beta of 1.080. 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. View our latest analysis for Ansell Strength Earnings growth over the past year exceeded its 5-year average. Debt is not viewed as a risk. Dividends are covered by earnings and cash flows. Weakness Earnings growth over the past year underperformed the Medical Equipment industry. Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market. Opportunity Annual earnings are forecast to grow faster than the Australian market. Good value based on P/E ratio and estimated fair value. Threat Annual revenue is forecast to grow slower than the Australian market. Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. 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. Why is the intrinsic value higher than the current share price? For Ansell, we've put together three further aspects you should further examine: Risks: For example, we've discovered 1 warning sign for Ansell that you should be aware of before investing here. Future Earnings: How does ANN'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. 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. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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. Error while retrieving data Sign in to access your portfolio Error while retrieving data Error while retrieving data Error while retrieving data Error while retrieving data
