A Look At The Fair Value Of MaxiTRANS Industries Limited (ASX:MXI)

Michael Canly

Wed, Feb 6, 2019, 5:06 PM

In this article I am going to calculate the intrinsic value of MaxiTRANS Industries Limited (ASX:MXI) by estimating the company’s future cash flows and discounting them to their present value. This is done 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 February 2019 so be sure check out the updated calculation by following the link below.

View our latest analysis for MaxiTRANS Industries

The calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (A$, Millions)	A$6.40	A$12.25	A$14.10	A$14.14	A$14.19
Source	Analyst x1	Analyst x2	Analyst x1	Est @ 0.32%	Est @ 0.32%
Present Value Discounted @ 12.95%	A$5.67	A$9.60	A$9.78	A$8.69	A$7.72

Present Value of 5-year Cash Flow (PVCF)= AU$41m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.3%. We discount this to today’s value at a cost of equity of 13%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = AU$14m × (1 + 2.3%) ÷ (13% – 2.3%) = AU$136m

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = AU$136m ÷ ( 1 + 13%)⁵ = AU$74m

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 AU$116m. 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 of A$0.63. Relative to the current share price of A$0.51, the stock is about right, perhaps slightly undervalued at a 19% discount to what it is available for right now.

ASX:MXI Intrinsic Value Export February 7th 19

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at MaxiTRANS Industries as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 13%, which is based on a levered beta of 1.384. This is derived from the Bottom-Up Beta method based on 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. For MXI, there are three relevant aspects you should further research:

Financial Health: Does MXI have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does MXI’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of MXI? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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