From Jan 6. Are Investors Undervaluing Evolution Mining Limited...

From Jan 6.

Are Investors Undervaluing Evolution Mining Limited (ASX:EVN) By 49%?

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Evolution Mining Limited (ASX:EVN) as an investment opportunity 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. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Evolution Mining
Crunching The Numbers

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 10	Column 11
0		2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
1	Levered FCF (A$, Millions)	-AU$112.1m	AU$394.6m	AU$711.9m	AU$704.5m	AU$846.0m	AU$950.2m	AU$1.04b	AU$1.11b	AU$1.17b	AU$1.22b
2	Growth Rate Estimate Source	Analyst x8	Analyst x7	Analyst x7	Analyst x3	Analyst x1	Est @ 12.32%	Est @ 9.19%	Est @ 6.99%	Est @ 5.45%	Est @ 4.38%
3	Present Value (A$, Millions) Discounted @ 9.3%	-AU$103	AU$331	AU$546	AU$494	AU$543	AU$558	AU$558	AU$546	AU$527	AU$504

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$4.5b
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 (1.9%) 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 9.3%.
Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = AU$1.2b× (1 + 1.9%) ÷ (9.3%– 1.9%) = AU$17b
Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= AU$17b÷ ( 1 + 9.3%)¹⁰= AU$6.9b
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 AU$11b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$3.2, the company appears quite undervalued at a 49% 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.

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