I am going to run you through how I calculated the intrinsic value of BlueScope Steel Limited (ASX:BSL) using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for BlueScope Steel here.
Crunching the numbers
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. Firstly, I took the analyst consensus estimates of BSL’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.17%. This resulted in a present value of 5-year cash flow of A$2,387.7M. Keen to know how I arrived at this number? Read our detailed analysis here.
Above is a visual representation of how BSL’s earnings are expected to move going forward, which should give you an idea of BSL’s outlook. Then, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes A$4,773.8M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is A$7,161.5M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of A$12.99, which, compared to the current share price of A$13.77, we find that BlueScope Steel is fair value, maybe slightly overvalued and not available at a discount at this time.
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.
For BSL, I’ve compiled three pertinent aspects you should further examine:
PS. Simply Wall St does a DCF calculation for every AU stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.