In This Article:
Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Fresnillo PLC (LON:FRES) as an investment opportunity by taking the expected future cash flows and discounting them to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.
Check out our latest analysis for Fresnillo
The model
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. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF ($, Millions) | $391.78 | $585.00 | $598.00 | $639.19 | $683.22 |
| Source | Analyst x6 | Analyst x4 | Analyst x1 | Est @ 6.89% | Est @ 6.89% |
| Present Value Discounted @ 9.65% | $357.30 | $486.54 | $453.57 | $442.14 | $430.99 |
Present Value of 5-year Cash Flow (PVCF)= US$2.17b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (1.4%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.7%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$683.2m × (1 + 1.4%) ÷ (9.7% – 1.4%) = US$8.39b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$8.39b ÷ ( 1 + 9.7%)5 = US$5.29b
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$7.46b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value in the company’s reported currency of $10.13. However, FRES’s primary listing is in Mexico, and 1 share of FRES in USD represents 0.765 ( USD/ GBP) share of LSE:FRES, so the intrinsic value per share in GBP is £7.75. Relative to the current share price of £8.54, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.