Calculating The Intrinsic Value Of Nasstar plc (AIM:NASA)

Does the share price for Nasstar plc (AIM:NASA) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in November 2017 so be sure check out the updated calculation by following the link below. View our latest analysis for Nasstar

Crunching the numbers

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. 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

2017 2018 2019 2020 2021
Levered FCF (GBP, Millions) £3.10 £3.10 £3.66 £4.28 £4.96
Source Analyst x1 Analyst x1 Extrapolated @ (18%, capped from 35.73%) Extrapolated @ (17%, capped from 35.73%) Extrapolated @ (16%, capped from 35.73%)
Present Value Discounted @ 9.31% £2.84 £2.59 £2.80 £3.00 £3.18

Present Value of 5-year Cash Flow (PVCF)= £14

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 1.5%. We discount this to today’s value at a cost of equity of 9.3%.

Terminal Value (TV) = FCF2021 × (1 + g) ÷ (r – g) = £5 × (1 + 1.5%) ÷ (9.3% – 1.5%) = £64

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = £64 / ( 1 + 9.3%)5 = £41

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is £56. In the final step we 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) or ADR then we use the equivalent number. This results in an intrinsic value of £0.10, which, compared to the current share price of £0.11, we see that Nasstar is fair value, maybe slightly overvalued and not available at a discount at this time.

AIM:NASA Intrinsic Value Nov 13th 17
AIM:NASA Intrinsic Value Nov 13th 17

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Nasstar 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 9.3%, which is based on a levered beta of 0.919. 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:

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. For NASA, I’ve compiled three relevant factors you should further research:

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the AIM every 6 hours. If you want to find the calculation for other stocks just search here.