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Calculating The Intrinsic Value Of Dimerix Limited (ASX:DXB)

Key Insights

  • The projected fair value for Dimerix is AU$0.18 based on 2 Stage Free Cash Flow to Equity

  • Dimerix's AU$0.21 share price indicates it is trading at similar levels as its fair value estimate

  • When compared to theindustry average discount of -10%, Dimerix's competitors seem to be trading at a lesser premium to fair value

How far off is Dimerix Limited (ASX:DXB) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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View our latest analysis for Dimerix

Is Dimerix Fairly Valued?

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) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (A$, Millions)

AU$1.09m

AU$1.53m

AU$1.96m

AU$2.37m

AU$2.73m

AU$3.04m

AU$3.30m

AU$3.52m

AU$3.70m

AU$3.86m

Growth Rate Estimate Source

Est @ 56.34%

Est @ 40.09%

Est @ 28.71%

Est @ 20.74%

Est @ 15.17%

Est @ 11.27%

Est @ 8.53%

Est @ 6.62%

Est @ 5.28%

Est @ 4.35%

Present Value (A$, Millions) Discounted @ 6.0%

AU$1.0

AU$1.4

AU$1.7

AU$1.9

AU$2.0

AU$2.1

AU$2.2

AU$2.2

AU$2.2

AU$2.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$19m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.0%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = AU$3.9m× (1 + 2.2%) ÷ (6.0%– 2.2%) = AU$104m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$104m÷ ( 1 + 6.0%)10= AU$58m

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$77m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$0.2, the company appears around fair value at the time of writing. 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

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Dimerix 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 6.0%, which is based on a levered beta of 0.826. 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 Dimerix

Strength

  • Debt is not viewed as a risk.

Weakness

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

  • Shareholders have been diluted in the past year.

Opportunity

  • Has sufficient cash runway for more than 3 years based on current free cash flows.

  • Lack of analyst coverage makes it difficult to determine DXB's earnings prospects.

Threat

  • No apparent threats visible for DXB.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 Dimerix, we've put together three important factors you should further examine:

  1. Risks: We feel that you should assess the 4 warning signs for Dimerix (2 are concerning!) we've flagged before making an investment in the company.

  2. 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!

  3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.