Just my opinion.
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow forecast
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
| 1 |
|
2018 |
2019 |
2020 |
2021 |
2022 |
| 2 |
Levered FCF (NZ$, Millions)[/B] |
NZ$130.00 |
NZ$209.00 |
NZ$258.50 |
NZ$302.45 |
NZ$350.84 |
| 3 |
Source |
Analyst x2 |
Analyst x2 |
Analyst x2 |
Extrapolated @ (17%, capped from 44.87%) |
Extrapolated @ (16%, capped from 44.87%) |
| 4 |
Present Value Discounted @ 8.55% |
NZ$119.76 |
NZ$177.37 |
NZ$202.09 |
NZ$217.82 |
NZ$232.76 |
Present Value of 5-year Cash Flow (PVCF)= NZ$950
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.6%.
Terminal Value (TV) = FCF
2022 × (1 + g) ÷ (r – g) = NZ$351 × (1 + 2.8%) ÷ (8.6% – 2.8%) = NZ$6,224
Present Value of Terminal Value (PVTV) = TV / (1 + r)
5 = NZ$6,224 / ( 1 + 8.6%)
5 = NZ$4,130
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is A$5,079. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of A$6.44, which, compared to the current share price of A$8.21, we see that a2 Milk is fair value, maybe slightly overvalued and not available at a discount at this time.
(20min delay)