An Intrinsic Calculation For St Barbara Limited (ASX:SBM) Suggests It's 43% Undervalued




  • In Business
  • 2019-05-26 20:26:22Z
  • By Simply Wall St.
 

How far off is St Barbara Limited (ASX:SBM) 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 today's value. I will use the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Check out our latest analysis for St Barbara

The model

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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

Present Value of 10-year Cash Flow (PVCF)= A$1.10b

"Est" = FCF growth rate estimated by Simply Wall St

After calculating the present value of future cash flows in the intial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 10-year government bond rate (2.3%) 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) = FCF2029 × (1 + g) ÷ (r - g) = AU$204m × (1 + 2.3%) ÷ (8.4% - 2.3%) = AU$3.4b

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = A$AU$3.4b ÷ ( 1 + 8.4%)10 = A$1.54b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is A$2.64b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value estimate of A$5.02. Relative to the current share price of A$2.84, the company appears quite undervalued 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.

The assumptions

Now 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 St Barbara 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 1.014. 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.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and 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?" 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. What is the reason for the share price to differ from the intrinsic value? For St Barbara, There are three pertinent aspects you should further research:

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

COMMENTS

More Related News

Investors In Himax Technologies, Inc. (NASDAQ:HIMX) Should Consider This, First
Investors In Himax Technologies, Inc. (NASDAQ:HIMX) Should Consider This, First

Today we'll take a closer look at Himax Technologies, Inc. (NASDAQ:HIMX) from a dividend investor's perspective...

Is There An Opportunity With Lacroix SA
Is There An Opportunity With Lacroix SA's (EPA:LACR) 35% Undervaluation?

In this article we are going to estimate the intrinsic value of Lacroix SA (EPA:LACR) by estimating the company's...

Is It Time To Consider Buying Nobia AB (publ) (STO:NOBI)?
Is It Time To Consider Buying Nobia AB (publ) (STO:NOBI)?

Nobia AB (publ) (STO:NOBI), which is in the consumer durables business, and is based in Sweden, received a lot of...

What Is Renishaw plc
What Is Renishaw plc's (LON:RSW) Share Price Doing?

Renishaw plc (LON:RSW), which is in the electronic business, and is based in United Kingdom, saw a double-digit share...

3 Stocks to Buy With Dividends Yielding More Than 6%
3 Stocks to Buy With Dividends Yielding More Than 6%

These MLPs offer income-seeking investors some big-time yields.

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Business

facebook
Hit "Like"
Don't miss any important news
Thanks, you don't need to show me this anymore.