I am going to walk y'all through the process. It is complicated (not intentionally) but if you can follow the steps it will take some of the mystery out of how the valuation is derived. Keep in mind there are many assumptions (by me in addition to those in the PFS). If something is not clear or I stating something as "obvious" which is up for debate then by all means challenge the assumption. Wont be the first time a model has been improved by an outside party, or I made an error.
I'll walk through the valuation in 3 posts on a new thread
(1) The balance sheet (BS). I'm going to start with the balance sheet from AR of 2020. I'm going to summarise it and then "reformulate it" so that it will be a little easier to see what changes are being made. So I'll be estimating what the BS will look like at the FY'21, FY'22 (which I'll use as the starting point in valuation) and for grins what FY'23 looks like
(2) Net Income (NI). This will be done via a Monte Carlo simulation of 5,000 iterations running a revenue project along a Triangular Probability Distribution. The objective is simply to come up with a STATISTICAL AVERAGE for NI and the Standard Deviation for FY'23, FY'24, FY'25, FY'26. In others words the way to read the "answer" is always going to be there is a 95% certainty that NI = Average +/- 2 x Std Deviation.
(3) Residual Earnings (RE). This model method is NOT related to discounted cash flow values or NPV although it does use some of the same concepts. So if I had a $100 and invested it and you said to mean I can get you a 10% return then if you give me $110 back then I've earned a 10% rate of return. But if you gave me $115 dollars back that extra $5 is "abnormal earnings" because you were expecting $10. That is the residual earnings I want to capture. So if a company's cost of capital was 10%, it does shareholders no good for the project to earn 10% ... it has to earn above its cost of capital AND it must be risk adjusted. After all if company A has more risk than company B I am naturally wanting to "discount" what I pay for A to compensate for that risk.
So what I going to do in the RE model is to assume we have a balance sheet with the Common Stockholders Equity (CSE) as at FY'22 and then use the simulated NI models for FY23,24,25,26 and plug that into a Monte Carlo simulation of 5,000 iterations (including an estimate of Continuing Value (CV) of income from operations) to come up with the INTRINSIC VALUE (IV) ... which is NOT a share price value ... it is the Present Value (PV) of the Future Value (FV) of the Net Income the company earns from operating its assets PLUS the current book value of equity. The IV is as at 30th June 2022 (so in no way a value "today")
Bear with me as I make the posts in a new thread ... they will be long posts!!!
LCK Price at posting:
16.5¢ Sentiment: Buy Disclosure: Held
(20min delay)