I am going to run you through how I calculated the intrinsic value of Tabcorp Holdings Limited (ASX:TAH) using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for Tabcorp Holdings here.
Crunching the numbers
I’ve used the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I pulled together the analyst consensus estimates of TAH’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity 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$574.1M. Want to know how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how TAH’s earnings are expected to move going forward, which should give you an idea of TAH’s outlook. Then, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable 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$3,233.4M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is A$3,807.5M. 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$4.58, which, compared to the current share price of A$4.85, we see that Tabcorp Holdings is fair value, maybe slightly overvalued at the time of writing.
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 TAH, I’ve put together three important aspects 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.