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SKY Network Television Limited (NZSE:SKT) Shares Could Be 44% Below Their Intrinsic Value Estimate

Key Insights

  • The projected fair value for SKY Network Television is NZ$5.08 based on 2 Stage Free Cash Flow to Equity

  • SKY Network Television's NZ$2.84 share price signals that it might be 44% undervalued

  • Analyst price target for SKT is NZ$3.10 which is 39% below our fair value estimate

In this article we are going to estimate the intrinsic value of SKY Network Television Limited (NZSE:SKT) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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Check out our latest analysis for SKY Network Television

What's The Estimated Valuation?

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 ten years of cash flows. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (NZ$, Millions)

NZ$92.0m

NZ$52.0m

NZ$65.0m

NZ$45.0m

NZ$34.0m

NZ$30.7m

NZ$28.8m

NZ$27.8m

NZ$27.3m

NZ$27.2m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Analyst x1

Analyst x1

Est @ -9.81%

Est @ -6.10%

Est @ -3.51%

Est @ -1.69%

Est @ -0.42%

Present Value (NZ$, Millions) Discounted @ 6.5%

NZ$86.4

NZ$45.8

NZ$53.8

NZ$35.0

NZ$24.8

NZ$21.0

NZ$18.5

NZ$16.8

NZ$15.5

NZ$14.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NZ$332m

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 (2.6%) 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 6.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = NZ$27m× (1 + 2.6%) ÷ (6.5%– 2.6%) = NZ$707m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$707m÷ ( 1 + 6.5%)10= NZ$376m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is NZ$709m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of NZ$2.8, the company appears quite undervalued at a 44% discount to where the stock price trades currently. 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.

dcf
dcf

The Assumptions

Now 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 these result, have a go at the calculation yourself and play with the assumptions. 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 SKY Network Television 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 6.5%, which is based on a levered beta of 0.858. 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 SKY Network Television

Strength

  • Currently debt free.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Earnings declined over the past year.

  • Dividend is low compared to the top 25% of dividend payers in the Media market.

Opportunity

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

  • Significant insider buying over the past 3 months.

Threat

  • Annual earnings are forecast to decline for the next 3 years.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for 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. Can we work out why the company is trading at a discount to intrinsic value? For SKY Network Television, we've compiled three pertinent items you should consider:

  1. Risks: Take risks, for example - SKY Network Television has 2 warning signs (and 1 which can't be ignored) we think you should know about.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for SKT's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  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. Simply Wall St updates its DCF calculation for every New Zealander stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.