Calculating The Intrinsic Value Of Navitas Limited (ASX:NVT)

How far off is Navitas Limited (ASX:NVT) 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 their present value. I will use 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 Navitas

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. To begin with we have to get estimates of 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 (AUD, Millions) A$43.50 A$82.50 A$98.00 A$102.00 A$110.02
Source Analyst x2 Analyst x2 Analyst x2 Analyst x1 Extrapolated @ (7.86%)
Present Value Discounted @ 8.76% A$40.00 A$69.75 A$76.18 A$72.91 A$72.31

Present Value of 5-year Cash Flow (PVCF)= A$331

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 8.8%.

Terminal Value (TV) = FCF2021 × (1 + g) ÷ (r – g) = A$110 × (1 + 2.8%) ÷ (8.8% – 2.8%) = A$1,885

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = A$1,885 / ( 1 + 8.8%)5 = A$1,239

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is A$1,570. 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 of A$4.39, which, compared to the current share price of A$4.8, we find that Navitas is fair value, maybe slightly overvalued at the time of writing.

ASX:NVT Intrinsic Value Nov 9th 17
ASX:NVT Intrinsic Value Nov 9th 17

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Navitas 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 8.8%, which is based on a levered beta of 0.828. 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 NVT, I’ve put together three important factors you should further research:

PS. Simply Wall St does a DCF calculation for every AU stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.