Yahoo Finance Dalrymple Bay Infrastructure Limited (ASX:DBI) Shares Could Be 34% Above Their Intrinsic Value Estimate
Key Insights
Dalrymple Bay Infrastructure's estimated fair value is AU$2.04 based on 2 Stage Free Cash Flow to Equity
Dalrymple Bay Infrastructure is estimated to be 34% overvalued based on current share price of AU$2.73
Analyst price target for DBI is AU$2.91, which is 43% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Dalrymple Bay Infrastructure Limited (ASX:DBI) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for Dalrymple Bay Infrastructure
Is Dalrymple Bay Infrastructure Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF (A$, Millions) | AU$112.5m | AU$106.4m | AU$103.0m | AU$101.4m | AU$100.9m | AU$101.3m | AU$102.2m | AU$103.5m | AU$105.1m | AU$106.9m |
Growth Rate Estimate Source | Est @ -8.71% | Est @ -5.45% | Est @ -3.16% | Est @ -1.57% | Est @ -0.45% | Est @ 0.33% | Est @ 0.88% | Est @ 1.27% | Est @ 1.53% | Est @ 1.72% |
Present Value (A$, Millions) Discounted @ 11% | AU$101 | AU$85.8 | AU$74.6 | AU$65.9 | AU$58.9 | AU$53.1 | AU$48.1 | AU$43.7 | AU$39.9 | AU$36.4 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$608m
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 (2.2%) 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 11%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = AU$107m× (1 + 2.2%) ÷ (11%– 2.2%) = AU$1.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$1.2b÷ ( 1 + 11%)10= AU$405m
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$1.0b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$2.7, the company appears reasonably expensive at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
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. 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 Dalrymple Bay Infrastructure 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 Dalrymple Bay Infrastructure
Strength
Earnings growth over the past year exceeded the industry.
Dividend is in the top 25% of dividend payers in the market.
Weakness
Earnings growth over the past year is below its 5-year average.
Interest payments on debt are not well covered.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Threat
Debt is not well covered by operating cash flow.
Dividends are not covered by earnings.
Annual earnings are forecast to grow slower than the Australian market.
Moving On:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price exceeding the intrinsic value? For Dalrymple Bay Infrastructure, there are three essential elements you should explore:
Risks: For example, we've discovered 2 warning signs for Dalrymple Bay Infrastructure (1 is potentially serious!) that you should be aware of before investing here.
Future Earnings: How does DBI'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.
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 ASX 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.
