How far off is EBOS Group Limited (NZSE:EBO) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for EBOS Group here.
What’s the value?
We are going to use a two-stage DCF model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I pulled together the analyst consensus forecast of EBO’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.55%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of NZ$295.2M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how EBO’s top and bottom lines are expected to move in the future, which should give you an idea of EBO’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady 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 NZ$2,252.9M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is NZ$2,548.2M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of NZ$16.70, which, compared to the current share price of NZ$17.54, we find that EBOS Group is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For EBO, I’ve put together three fundamental factors you should look at:
PS. Simply Wall St does a DCF calculation for every NZ 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.