I am going to run you through how I calculated the intrinsic value of The Citadel Group Limited (ASX:CGL) 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 Citadel Group here.
What’s the value?
I use what is known as the 2-stage 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. To start off, I pulled together the analyst consensus estimates of CGL’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.55%. This resulted in a present value of 5-year cash flow of A$57.9M. Want to understand how I arrived at this number? Read our detailed analysis here.
In the visual above, we see how how CGL’s earnings are expected to move in the future, which should give you some color on CGL’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 stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of A$303.7M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is A$361.6M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of A$7.37, which, compared to the current share price of A$6.23, we see that Citadel Group is about right, perhaps slightly undervalued at a 15.42% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For CGL, I’ve put together three important factors you should look at:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the ASX every 6 hours. If you want to find the calculation for other stocks 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.