Key Insights
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Imdex's estimated fair value is AU$4.58 based on 2 Stage Free Cash Flow to Equity
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Imdex's AU$3.86 share price indicates it is trading at similar levels as its fair value estimate
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Analyst price target for IMD is AU$3.63 which is 21% below our fair value estimate
In this article we are going to estimate the intrinsic value of Imdex Limited ( ASX:IMD ) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model .
Step By Step Through The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (A$, Millions) |
AU$6.67m |
AU$84.3m |
AU$98.0m |
AU$108.4m |
AU$117.5m |
AU$125.6m |
AU$132.9m |
AU$139.7m |
AU$146.0m |
AU$152.1m |
| Growth Rate Estimate Source |
Analyst x3 |
Analyst x3 |
Analyst x3 |
Est @ 10.62% |
Est @ 8.43% |
Est @ 6.89% |
Est @ 5.81% |
Est @ 5.06% |
Est @ 4.53% |
Est @ 4.16% |
| Present Value (A$, Millions) Discounted @ 7.8% |
AU$6.2 |
AU$72.6 |
AU$78.2 |
AU$80.3 |
AU$80.7 |
AU$80.1 |
AU$78.6 |
AU$76.6 |
AU$74.3 |
AU$71.7 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= AU$699m
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 (3.3%) 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 7.8%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$152m× (1 + 3.3%) ÷ (7.8%– 3.3%) = AU$3.5b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$3.5b÷ ( 1 + 7.8%)10= AU$1.6b
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 AU$2.3b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$3.9, the company appears about fair value at a 16% 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
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Imdex 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 7.8%, which is based on a levered beta of 1.069. 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 Imdex
SWOT Analysis for Imdex
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.
Weakness
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Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
Opportunity
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Annual revenue is forecast to grow faster than the Australian market.
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Current share price is below our estimate of fair value.
Threat
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Annual earnings are forecast to grow slower than the Australian market.
Looking Ahead:
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. DCF models are not the be-all and end-all of investment valuation. 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Imdex, we've put together three essential aspects you should further examine:
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Risks: For instance, we've identified 1 warning sign for Imdex that you should be aware of.
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Future Earnings: How does IMD'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 .
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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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX 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.
