Australian Tourists Face Levy to Visit NZ Sites
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Good morning, Rich Henderson in Bloomberg's Melbourne bureau with the latest:
Today's must-reads:
• Australian tourists face NZ levy
• Household spending weaker
• Australia to buy Japanese naval frigates
Australian tourists crossing the Tasman will be charged to visit some of New Zealand's most popular tourist sites such as Milford Sound under a new levy system that could be introduced in 2027.
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These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. The Calculation We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (A$, Millions) AU$92.2m AU$101.4m AU$102.3m AU$103.9m AU$106.0m AU$108.4m AU$111.2m AU$114.2m AU$117.5m AU$120.9m Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x1 Est @ 1.53% Est @ 2.00% Est @ 2.33% Est @ 2.57% Est @ 2.73% Est @ 2.84% Est @ 2.92% Present Value (A$, Millions) Discounted @ 7.8% AU$85.5 AU$87.2 AU$81.6 AU$76.9 AU$72.7 AU$69.0 AU$65.6 AU$62.5 AU$59.7 AU$56.9 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$718m We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 3.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$121m× (1 + 3.1%) ÷ (7.8%– 3.1%) = AU$2.6b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$2.6b÷ ( 1 + 7.8%)10= AU$1.2b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$2.0b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$2.0, the company appears quite good value at a 37% 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. The Assumptions The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Service Stream 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 7.8%, which is based on a levered beta of 1.119. 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. See our latest analysis for Service Stream SWOT Analysis for Service Stream Strength Earnings growth over the past year exceeded the industry. Currently debt free. Dividends are covered by earnings and cash flows. Weakness Dividend is low compared to the top 25% of dividend payers in the Construction market. Opportunity Annual earnings are forecast to grow for the next 4 years. Trading below our estimate of fair value by more than 20%. Threat Annual earnings are forecast to grow slower than the Australian market. Looking Ahead: Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. Can we work out why the company is trading at a discount to intrinsic value? For Service Stream, we've compiled three further items you should consider: Risks: As an example, we've found 1 warning sign for Service Stream that you need to consider before investing here. Future Earnings: How does SSM'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 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 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.
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