A Look At The Intrinsic Value Of Atlas Arteria Limited (ASX:ALX)

Simply Wall St.

Sun, Sep 30, 2018, 6:27 PM

I am going to run you through how I calculated the intrinsic value of Atlas Arteria Limited (ASX:ALX) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 October 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for Atlas Arteria

What’s the value?

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. 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 this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (A$, Millions)	A$250.00	A$244.00	A$287.92	A$336.87	A$390.77
Source	Analyst x1	Analyst x1	Est @ 18%, capped from 83.48%	Est @ 17%, capped from 83.48%	Est @ 16%, capped from 83.48%
Present Value Discounted @ 8.55%	A$230.30	A$207.06	A$225.07	A$242.58	A$259.22

Present Value of 5-year Cash Flow (PVCF)= AU$1.16b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.8%. We discount this to today’s value at a cost of equity of 8.6%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = AU$390.8m × (1 + 2.8%) ÷ (8.6% – 2.8%) = AU$6.95b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = AU$6.95b ÷ ( 1 + 8.6%)⁵ = AU$4.61b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$5.77b. 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$8.62. Relative to the current share price of A$6.98, the stock is about right, perhaps slightly undervalued at a 19.0% discount to what it is available for right now.

ASX:ALX Intrinsic Value Export October 1st 18

The assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Atlas Arteria 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 8.6%, which is based on a levered beta of 0.800. 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 ALX, I’ve compiled three relevant factors you should further examine:

Financial Health: Does ALX 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 ALX’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 ALX? 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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