Advertisement
Australia markets closed
  • ALL ORDS

    7,837.40
    -100.10 (-1.26%)
     
  • ASX 200

    7,575.90
    -107.10 (-1.39%)
     
  • AUD/USD

    0.6538
    +0.0015 (+0.23%)
     
  • OIL

    83.73
    +0.16 (+0.19%)
     
  • GOLD

    2,353.60
    +11.10 (+0.47%)
     
  • Bitcoin AUD

    98,432.79
    +1,192.51 (+1.23%)
     
  • CMC Crypto 200

    1,343.83
    -52.71 (-3.77%)
     
  • AUD/EUR

    0.6112
    +0.0039 (+0.65%)
     
  • AUD/NZD

    1.0981
    +0.0023 (+0.21%)
     
  • NZX 50

    11,805.09
    -141.34 (-1.18%)
     
  • NASDAQ

    17,679.53
    +249.02 (+1.43%)
     
  • FTSE

    8,135.01
    +56.15 (+0.70%)
     
  • Dow Jones

    38,279.10
    +193.30 (+0.51%)
     
  • DAX

    18,172.66
    +255.38 (+1.43%)
     
  • Hang Seng

    17,651.15
    +366.61 (+2.12%)
     
  • NIKKEI 225

    37,934.76
    +306.28 (+0.81%)
     

Calculating The Intrinsic Value Of Australis Oil & Gas Limited (ASX:ATS)

Key Insights

  • The projected fair value for Australis Oil & Gas is AU$0.046 based on 2 Stage Free Cash Flow to Equity

  • With AU$0.042 share price, Australis Oil & Gas appears to be trading close to its estimated fair value

  • Australis Oil & Gas' peers seem to be trading at a higher discount to fair value based onthe industry average of 34%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Australis Oil & Gas Limited (ASX:ATS) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

ADVERTISEMENT

See our latest analysis for Australis Oil & Gas

Crunching The Numbers

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 ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF ($, Millions)

US$3.44m

US$3.34m

US$3.29m

US$3.28m

US$3.29m

US$3.32m

US$3.35m

US$3.40m

US$3.45m

US$3.51m

Growth Rate Estimate Source

Est @ -4.85%

Est @ -2.81%

Est @ -1.39%

Est @ -0.39%

Est @ 0.30%

Est @ 0.79%

Est @ 1.13%

Est @ 1.37%

Est @ 1.54%

Est @ 1.66%

Present Value ($, Millions) Discounted @ 9.9%

US$3.1

US$2.8

US$2.5

US$2.3

US$2.1

US$1.9

US$1.7

US$1.6

US$1.5

US$1.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$21m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (1.9%) 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 9.9%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$3.5m× (1 + 1.9%) ÷ (9.9%– 1.9%) = US$45m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$45m÷ ( 1 + 9.9%)10= US$18m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$38m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of AU$0.04, the company appears about fair value at a 9.6% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

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 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 Australis Oil & Gas 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 9.9%, which is based on a levered beta of 1.337. 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.

SWOT Analysis for Australis Oil & Gas

Strength

  • Debt is well covered by cash flow.

Weakness

  • Interest payments on debt are not well covered.

  • Shareholders have been diluted in the past year.

Opportunity

  • Current share price is below our estimate of fair value.

Threat

  • No apparent threats visible for ATS.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for 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 Australis Oil & Gas, we've put together three essential elements you should assess:

  1. Risks: As an example, we've found 4 warning signs for Australis Oil & Gas (1 is potentially serious!) that you need to consider before investing here.

  2. Future Earnings: How does ATS'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.

  3. 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. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock 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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here