Yahoo Finance An Intrinsic Calculation For Silver Lake Resources Limited (ASX:SLR) Shows It’s 25.18% Undervalued
In this article I am going to calculate the intrinsic value of Silver Lake Resources Limited (ASX:SLR) by projecting its future cash flows and then discounting them to today’s value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not December 2018 then I highly recommend you check out the latest calculation for Silver Lake Resources by following the link below.
Check out our latest analysis for Silver Lake Resources
The model
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 five years. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (A$, Millions) | A$30.83 | A$29.81 | A$28.83 | A$27.88 | A$26.97 |
Source | Est @ -3.29% | Est @ -3.29% | Est @ -3.29% | Est @ -3.29% | Est @ -3.29% |
Present Value Discounted @ 9.63% | A$28.12 | A$24.81 | A$21.88 | A$19.31 | A$17.03 |
Present Value of 5-year Cash Flow (PVCF)= AU$111m
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 the GDP. In this case I have used the 10-year government bond rate (2.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.6%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = AU$27m × (1 + 2.8%) ÷ (9.6% – 2.8%) = AU$404m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$404m ÷ ( 1 + 9.6%)5 = AU$255m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$367m. 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$0.72. Compared to the current share price of A$0.54, the stock is about right, perhaps slightly undervalued at a 25% discount to what it is available for right now.
Important assumptions
I’d like to 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Silver Lake Resources 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 9.6%, which is based on a levered beta of 0.948. 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:
Although the valuation of a company is important, 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 SLR, I’ve put together three key aspects you should further examine:
Financial Health: Does SLR 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 SLR’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 SLR? 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.
