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Newcrest Mining Limited (ASX:NCM) Investors Are Paying Above The Intrinsic Value

How far off is Newcrest Mining Limited (ASX:NCM) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! 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. If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Newcrest Mining by following the link below. View out our latest analysis for Newcrest Mining

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. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2018

2019

2020

2021

2022

Levered FCF ($, Millions)

$471.50

$921.07

$1.04k

$1.10k

$861.00

Source

Analyst x4

Analyst x6

Analyst x6

Analyst x2

Analyst x2

Present Value Discounted @ 10.51%

$426.67

$754.24

$771.98

$739.97

$522.46

Present Value of 5-year Cash Flow (PVCF)= AU$3.22b

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We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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 10.5%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = AU$861.00m × (1 + 2.8%) ÷ (10.5% – 2.8%) = AU$11.44b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$11.44b ÷ ( 1 + 10.5%)5 = AU$6.94b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$10.16b. 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 in the company’s reported currency of $13.25. However, NCM’s primary listing is in Australia, and 1 share of NCM in USD represents 1.35 ( USD/ AUD) share of OTCPK:NCMG.Y, so the intrinsic value per share in AUD is A$17.9. Relative to the current share price of A$21.63, the stock is fair value, maybe slightly overvalued at the time of writing.

ASX:NCM Intrinsic Value June 26th 18
ASX:NCM Intrinsic Value June 26th 18

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 Newcrest Mining 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 10.5%, which is based on a levered beta of 1.07. 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 NCM, I’ve put together three pertinent aspects you should further research:

  1. Financial Health: Does NCM 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.

  2. Future Earnings: How does NCM’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: Are there other high quality stocks you could be holding instead of NCM? 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 pass 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.