A Look At The Fair Value Of Viva Leisure Limited (ASX:VVA)

editorial-team@simplywallst.com (Simply Wall St)

Mon, Apr 14, 2025, 10:33 PM 6 min read

In this article we are going to estimate the intrinsic value of Viva Leisure Limited (ASX:VVA) by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

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The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (A$, Millions)	-AU$5.37m	AU$13.5m	AU$18.1m	AU$16.4m	AU$15.5m	AU$15.1m	AU$14.9m	AU$14.8m	AU$14.9m	AU$15.1m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x2	Est @ -9.12%	Est @ -5.56%	Est @ -3.07%	Est @ -1.33%	Est @ -0.11%	Est @ 0.75%	Est @ 1.34%
Present Value (A$, Millions) Discounted @ 11%	-AU$4.8	AU$10.9	AU$13.1	AU$10.7	AU$9.1	AU$7.9	AU$7.0	AU$6.3	AU$5.7	AU$5.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$71m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.7%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = AU$15m× (1 + 2.7%) ÷ (11%– 2.7%) = AU$180m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= AU$180m÷ ( 1 + 11%)¹⁰= AU$61m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$132m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of AU$1.3, the company appears about fair value at a 6.1% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — ASX:VVA Discounted Cash Flow April 15th 2025

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Viva Leisure as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 11%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

View our latest analysis for Viva Leisure

SWOT Analysis for Viva Leisure

Strength

Debt is well covered by cash flow.

Weakness

Earnings growth over the past year underperformed the Hospitality industry.

Interest payments on debt are not well covered.

Opportunity

Annual earnings are forecast to grow faster than the Australian market.

Current share price is below our estimate of fair value.

Threat

No apparent threats visible for VVA.

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. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Viva Leisure, there are three important factors you should explore:

Risks: Be aware that Viva Leisure is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
Future Earnings: How does VVA'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: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.