Does the share price for 1300SMILES Limited (ASX:ONT) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of 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 1300SMILES here.
What’s the value?
I’ve used the 2-stage growth 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. To start off, I pulled together the analyst consensus estimates of ONT’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate 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 A$33.3M. Want to understand how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how ONT’s earnings are expected to move going forward, which should give you an idea of ONT’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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$126.2M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is A$159.6M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of A$6.74, which, compared to the current share price of A$6.74, we see that 1300SMILES is fair value, maybe slightly overvalued and not available at a discount at this time.
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 ONT, there are three pertinent 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.