Calculating The Intrinsic Value Of MaxiPARTS Limited (ASX:MXI)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, MaxiPARTS fair value estimate is AU$2.59

• Current share price of AU$2.89 suggests MaxiPARTS is potentially trading close to its fair value

• When compared to theindustry average discount of -6.8%, MaxiPARTS' competitors seem to be trading at a lesser premium to fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of MaxiPARTS Limited (ASX:MXI) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for MaxiPARTS

Is MaxiPARTS Fairly Valued?

We're using 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 a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (A$, Millions)	AU$20.7m	AU$13.9m	AU$10.5m	AU$8.72m	AU$7.75m	AU$7.19m	AU$6.88m	AU$6.71m	AU$6.63m	AU$6.62m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -24.73%	Est @ -16.70%	Est @ -11.09%	Est @ -7.16%	Est @ -4.41%	Est @ -2.48%	Est @ -1.14%	Est @ -0.19%
Present Value (A$, Millions) Discounted @ 7.9%	AU$19.2	AU$11.9	AU$8.3	AU$6.4	AU$5.3	AU$4.6	AU$4.0	AU$3.7	AU$3.3	AU$3.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$70m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (2.0%) 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 7.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = AU$6.6m× (1 + 2.0%) ÷ (7.9%– 2.0%) = AU$115m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= AU$115m÷ ( 1 + 7.9%)¹⁰= AU$54m

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$124m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$2.9, 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

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 MaxiPARTS 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 7.9%, which is based on a levered beta of 1.176. 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 MaxiPARTS

Strength

• Earnings growth over the past year exceeded the industry.

• Debt is not viewed as a risk.

• Dividends are covered by earnings and cash flows.

Weakness

• Dividend is low compared to the top 25% of dividend payers in the Machinery market.

• Expensive based on P/E ratio and estimated fair value.

Opportunity

• Annual earnings are forecast to grow faster than the Australian market.

Threat

• No apparent threats visible for MXI.

Next Steps:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For MaxiPARTS, we've put together three further aspects you should look at:

1. Risks: Case in point, we've spotted 1 warning sign for MaxiPARTS you should be aware of.

2. Future Earnings: How does MXI'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.

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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.