Latest news with #stockvaluation
Yahoo
11 hours ago
- Business
- Yahoo
Are Investors Undervaluing Kimly Limited (Catalist:1D0) By 47%?
Kimly's estimated fair value is S$0.63 based on 2 Stage Free Cash Flow to Equity Current share price of S$0.33 suggests Kimly is potentially 47% undervalued Kimly's peers are currently trading at a premium of 3,106% on average Does the June share price for Kimly Limited (Catalist:1D0) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple! 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. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. 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, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (SGD, Millions) S$49.8m S$1.80m S$50.6m S$50.5m S$50.8m S$51.4m S$52.1m S$53.0m S$54.1m S$55.2m Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Est @ 0.58% Est @ 1.11% Est @ 1.49% Est @ 1.75% Est @ 1.93% Est @ 2.06% Present Value (SGD, Millions) Discounted @ 7.9% S$46.1 S$1.5 S$40.2 S$37.2 S$34.7 S$32.5 S$30.6 S$28.8 S$27.2 S$25.7 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = S$305m 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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = S$55m× (1 + 2.4%) ÷ (7.9%– 2.4%) = S$1.0b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$1.0b÷ ( 1 + 7.9%)10= S$473m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$778m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.3, the company appears quite undervalued at a 47% 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 calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Kimly 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 7.9%, which is based on a levered beta of 1.286. 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 Kimly Strength Debt is not viewed as a risk. Dividends are covered by earnings and cash flows. Dividend is in the top 25% of dividend payers in the market. Weakness Earnings declined over the past year. Opportunity Annual earnings are forecast to grow faster than the Singaporean market. Trading below our estimate of fair value by more than 20%. Threat No apparent threats visible for 1D0. 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. 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 Kimly, there are three relevant elements you should look at: Risks: Take risks, for example - Kimly has 1 warning sign we think you should be aware of. Future Earnings: How does 1D0'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 Singaporean 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 in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
12 hours ago
- Business
- Yahoo
Are Investors Undervaluing Praemium Limited (ASX:PPS) By 43%?
The projected fair value for Praemium is AU$1.16 based on 2 Stage Free Cash Flow to Equity Current share price of AU$0.66 suggests Praemium is potentially 43% undervalued Our fair value estimate is 26% higher than Praemium's analyst price target of AU$0.92 How far off is Praemium Limited (ASX:PPS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple! We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (A$, Millions) AU$10.3m AU$14.8m AU$19.6m AU$23.1m AU$27.2m AU$30.3m AU$33.0m AU$35.3m AU$37.4m AU$39.2m Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x5 Analyst x1 Analyst x1 Est @ 11.39% Est @ 8.86% Est @ 7.09% Est @ 5.85% Est @ 4.98% Present Value (A$, Millions) Discounted @ 7.9% AU$9.6 AU$12.7 AU$15.6 AU$17.1 AU$18.6 AU$19.2 AU$19.4 AU$19.3 AU$18.9 AU$18.4 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$169m We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.9%) 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 7.9%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$39m× (1 + 2.9%) ÷ (7.9%– 2.9%) = AU$820m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$820m÷ ( 1 + 7.9%)10= AU$384m 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$553m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$0.7, the company appears quite good value at a 43% 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 Praemium 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 7.9%, which is based on a levered beta of 1.138. 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 Praemium Strength Currently debt free. Weakness Earnings growth over the past year underperformed the Software industry. Dividend is low compared to the top 25% of dividend payers in the Software market. Opportunity Annual earnings are forecast to grow faster than the Australian market. Trading below our estimate of fair value by more than 20%. Threat Dividends are not covered by cash flow. Revenue is forecast to grow slower than 20% per year. Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. Can we work out why the company is trading at a discount to intrinsic value? For Praemium, there are three important factors you should assess: Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Praemium , and understanding these should be part of your investment process. Future Earnings: How does PPS'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. 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Yahoo
2 days ago
- Business
- Yahoo
An Intrinsic Calculation For Allgeier SE (ETR:AEIN) Suggests It's 32% Undervalued
Allgeier's estimated fair value is €29.16 based on 2 Stage Free Cash Flow to Equity Allgeier is estimated to be 32% undervalued based on current share price of €19.70 The €25.25 analyst price target for AEIN is 13% less than our estimate of fair value Does the June share price for Allgeier SE (ETR:AEIN) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple! 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. AI is about to change healthcare. 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. 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. To start off with, we need to estimate the next ten years of cash flows. 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: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (€, Millions) €23.2m €19.5m €27.8m €26.8m €26.2m €25.9m €25.8m €25.8m €25.9m €26.1m Growth Rate Estimate Source Analyst x1 Analyst x2 Analyst x2 Est @ -3.65% Est @ -2.17% Est @ -1.14% Est @ -0.42% Est @ 0.09% Est @ 0.44% Est @ 0.69% Present Value (€, Millions) Discounted @ 8.3% €21.4 €16.6 €21.9 €19.5 €17.6 €16.0 €14.7 €13.6 €12.6 €11.7 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = €166m 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 1.3%. We discount the terminal cash flows to today's value at a cost of equity of 8.3%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = €26m× (1 + 1.3%) ÷ (8.3%– 1.3%) = €375m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €375m÷ ( 1 + 8.3%)10= €169m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €335m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of €19.7, the company appears quite good value at a 32% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Allgeier 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 8.3%, which is based on a levered beta of 1.627. 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. Check out our latest analysis for Allgeier Strength Debt is well covered by cash flow. Dividends are covered by earnings and cash flows. Weakness Earnings declined over the past year. Interest payments on debt are not well covered. Dividend is low compared to the top 25% of dividend payers in the IT market. Opportunity Annual earnings are forecast to grow faster than the German market. Trading below our estimate of fair value by more than 20%. Threat Annual revenue is forecast to grow slower than the German market. 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. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. Can we work out why the company is trading at a discount to intrinsic value? For Allgeier, we've put together three essential items you should assess: Risks: Be aware that Allgeier is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning... Future Earnings: How does AEIN'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 German 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.
Yahoo
6 days ago
- Business
- Yahoo
Is QL Resources Berhad (KLSE:QL) Expensive For A Reason? A Look At Its Intrinsic Value
The projected fair value for QL Resources Berhad is RM3.41 based on 2 Stage Free Cash Flow to Equity Current share price of RM4.55 suggests QL Resources Berhad is potentially 34% overvalued The RM4.80 analyst price target for QL is 41% more than our estimate of fair value Does the June share price for QL Resources Berhad (KLSE:QL) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example! We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. AI is about to change healthcare. 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. 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: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (MYR, Millions) RM273.1m RM305.7m RM430.6m RM666.7m RM703.6m RM738.6m RM772.4m RM805.6m RM838.6m RM871.8m Growth Rate Estimate Source Analyst x1 Analyst x2 Analyst x2 Analyst x2 Est @ 5.55% Est @ 4.97% Est @ 4.57% Est @ 4.29% Est @ 4.10% Est @ 3.96% Present Value (MYR, Millions) Discounted @ 8.4% RM252 RM260 RM338 RM483 RM470 RM456 RM440 RM423 RM406 RM390 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM3.9b 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 8.4%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM872m× (1 + 3.6%) ÷ (8.4%– 3.6%) = RM19b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM19b÷ ( 1 + 8.4%)10= RM8.5b The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is RM12b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of RM4.6, the company appears reasonably expensive at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 QL Resources 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 8.4%, which is based on a levered beta of 0.800. 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 QL Resources Berhad Strength Debt is not viewed as a risk. Weakness Earnings growth over the past year underperformed the Food industry. Dividend is low compared to the top 25% of dividend payers in the Food market. Expensive based on P/E ratio and estimated fair value. Opportunity Annual revenue is forecast to grow faster than the Malaysian market. Threat Annual earnings are forecast to grow slower than the Malaysian market. Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a premium to intrinsic value? For QL Resources Berhad, we've put together three essential items you should further research: Financial Health: Does QL have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does QL'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 Malaysian 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 in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
02-06-2025
- Business
- Yahoo
Is Avingtrans plc (LON:AVG) Trading At A 23% Discount?
The projected fair value for Avingtrans is UK£5.34 based on 2 Stage Free Cash Flow to Equity Avingtrans is estimated to be 23% undervalued based on current share price of UK£4.10 When compared to theindustry average discount to fair value of 8.4%, Avingtrans' competitors seem to be trading at a lesser discount Does the June share price for Avingtrans plc (LON:AVG) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple! 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. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. 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 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) -UK£6.57m UK£2.34m UK£3.98m UK£5.96m UK£8.09m UK£10.2m UK£12.1m UK£13.8m UK£15.2m UK£16.4m Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ 70.19% Est @ 49.90% Est @ 35.69% Est @ 25.75% Est @ 18.78% Est @ 13.91% Est @ 10.50% Est @ 8.11% Present Value (£, Millions) Discounted @ 8.3% -UK£6.1 UK£2.0 UK£3.1 UK£4.3 UK£5.4 UK£6.3 UK£6.9 UK£7.2 UK£7.4 UK£7.4 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = UK£44m We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.5%) 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 8.3%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = UK£16m× (1 + 2.5%) ÷ (8.3%– 2.5%) = UK£291m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£291m÷ ( 1 + 8.3%)10= UK£130m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£174m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of UK£4.1, the company appears a touch undervalued at a 23% 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. We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Avingtrans 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 8.3%, which is based on a levered beta of 1.131. 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. Check out our latest analysis for Avingtrans Strength Debt is not viewed as a risk. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Machinery market. Opportunity Annual revenue is forecast to grow faster than the British market. Trading below our estimate of fair value by more than 20%. Threat No apparent threats visible for AVG. 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 Avingtrans, we've put together three further items you should look at: Risks: For example, we've discovered 1 warning sign for Avingtrans that you should be aware of before investing here. Future Earnings: How does AVG'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 British 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.
