Yahoo Finance An Intrinsic Calculation For MSL Solutions Limited (ASX:MPW) Shows It’s 30.54% Undervalued
Does the November share price for MSL Solutions Limited (ASX:MPW) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.
See our latest analysis for MSL Solutions
Step by step through the calculation
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (A$, Millions) | A$2.96 | A$3.53 | A$4.16 | A$4.87 | A$5.65 |
Source | Est @ 20%, capped from 26.83% | Est @ 19%, capped from 26.83% | Est @ 18%, capped from 26.83% | Est @ 17%, capped from 26.83% | Est @ 16%, capped from 26.83% |
Present Value Discounted @ 9.9% | A$2.70 | A$2.92 | A$3.13 | A$3.34 | A$3.52 |
Present Value of 5-year Cash Flow (PVCF)= AU$16m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.8%. We discount this to today’s value at a cost of equity of 9.9%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = AU$5.6m × (1 + 2.8%) ÷ (9.9% – 2.8%) = AU$81m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$81m ÷ ( 1 + 9.9%)5 = AU$51m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$66m. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of A$0.27. Relative to the current share price of A$0.18, the stock is quite undervalued at a 31% discount to what it is available for right now.
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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at MSL Solutions as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.9%, which is based on a levered beta of 0.986. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For MPW, I’ve compiled three essential aspects you should further research:
Financial Health: Does MPW have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does MPW’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of MPW? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the ASX every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
