Key Insights
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Mainfreight's estimated fair value is NZ$71.26 based on 2 Stage Free Cash Flow to Equity
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Mainfreight's NZ$68.27 share price indicates it is trading at similar levels as its fair value estimate
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Analyst price target for MFT is NZ$74.17, which is 4.1% above our fair value estimate
Does the January share price for Mainfreight Limited ( NZSE:MFT ) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model .
The Method
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (NZ$, Millions) |
NZ$174.2m |
NZ$194.0m |
NZ$239.5m |
NZ$291.6m |
NZ$334.3m |
NZ$367.4m |
NZ$397.0m |
NZ$423.9m |
NZ$448.7m |
NZ$472.1m |
| Growth Rate Estimate Source |
Analyst x2 |
Analyst x2 |
Analyst x2 |
Analyst x1 |
Analyst x1 |
Est @ 9.91% |
Est @ 8.06% |
Est @ 6.76% |
Est @ 5.85% |
Est @ 5.21% |
| Present Value (NZ$, Millions) Discounted @ 8.1% |
NZ$161 |
NZ$166 |
NZ$189 |
NZ$213 |
NZ$226 |
NZ$230 |
NZ$230 |
NZ$227 |
NZ$222 |
NZ$216 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= NZ$2.1b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.7%. We discount the terminal cash flows to today's value at a cost of equity of 8.1%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = NZ$472m× (1 + 3.7%) ÷ (8.1%– 3.7%) = NZ$11b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$11b÷ ( 1 + 8.1%)10= NZ$5.1b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is NZ$7.2b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of NZ$68.3, the company appears about fair value at a 4.2% 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.
The 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. 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 Mainfreight 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 8.1%, which is based on a levered beta of 1.045. 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.
See our latest analysis for Mainfreight
SWOT Analysis for Mainfreight
Strength
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Earnings growth over the past year exceeded the industry.
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Debt is not viewed as a risk.
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Dividends are covered by earnings and cash flows.
Weakness
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Dividend is low compared to the top 25% of dividend payers in the Logistics market.
Opportunity
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Annual revenue is forecast to grow faster than the New Zealander market.
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Good value based on P/E ratio and estimated fair value.
Threat
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Annual earnings are forecast to grow slower than the New Zealander market.
Next Steps:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize 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. For Mainfreight, we've compiled three pertinent aspects you should look at:
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Financial Health: Does MFT 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.
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Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for MFT's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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Other High Quality Alternatives: Do you like a good all-rounder? 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 valuation for every stock on the NZSE 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.
