Century Casinos, Inc. (NASDAQ:CNTY) Shares Could Be 34% Below Their Intrinsic Value Estimate

Key Insights

• Century Casinos' estimated fair value is US$4.47 based on 2 Stage Free Cash Flow to Equity

• Century Casinos is estimated to be 34% undervalued based on current share price of US$2.94

• The US$4.50 analyst price target for CNTYis comparable to our estimate of fair value.

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Century Casinos, Inc. (NASDAQ:CNTY) as an investment opportunity by estimating the company's future cash flows and discounting them to their present 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.

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.

Check out our latest analysis for Century Casinos

The Method

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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 ($, Millions)	-US$42.3m	US$18.9m	US$18.9m	US$19.0m	US$19.2m	US$19.5m	US$19.8m	US$20.2m	US$20.6m	US$21.0m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -0.14%	Est @ 0.59%	Est @ 1.10%	Est @ 1.46%	Est @ 1.71%	Est @ 1.88%	Est @ 2.00%	Est @ 2.09%
Present Value ($, Millions) Discounted @ 11%	-US$37.9	US$15.2	US$13.6	US$12.3	US$11.1	US$10.1	US$9.3	US$8.5	US$7.7	US$7.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$57m

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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$21m× (1 + 2.3%) ÷ (11%– 2.3%) = US$234m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$234m÷ ( 1 + 11%)¹⁰= US$79m

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$136m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$2.9, the company appears quite good value at a 34% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

Important Assumptions

Now 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 these inputs, I recommend redoing the calculations yourself and playing with them. 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 Century Casinos 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 11%, which is based on a levered beta of 2.000. 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 Century Casinos

Strength

• No major strengths identified for CNTY.

Weakness

• Interest payments on debt are not well covered.

Opportunity

• Forecast to reduce losses next year.

• Good value based on P/S ratio and estimated fair value.

Threat

• Debt is not well covered by operating cash flow.

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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Century Casinos, we've compiled three essential factors you should look at:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Century Casinos .

2. Future Earnings: How does CNTY'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQCM every day. If you want to find the calculation for other stocks 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.