Stock Analysis
- Australia
- /
- Trade Distributors
- /
- ASX:SVW
An Intrinsic Calculation For Seven Group Holdings Limited (ASX:SVW) Suggests It's 23% Undervalued
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Seven Group Holdings fair value estimate is AU$48.28
- Seven Group Holdings' AU$37.03 share price signals that it might be 23% undervalued
- Analyst price target for SVW is AU$39.27 which is 19% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of Seven Group Holdings Limited (ASX:SVW) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Seven Group Holdings
Crunching The Numbers
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (A$, Millions) | AU$703.8m | AU$828.7m | AU$1.00b | AU$1.05b | AU$1.08b | AU$1.11b | AU$1.15b | AU$1.18b | AU$1.21b | AU$1.24b |
Growth Rate Estimate Source | Analyst x4 | Analyst x3 | Analyst x1 | Analyst x1 | Est @ 3.36% | Est @ 3.07% | Est @ 2.87% | Est @ 2.73% | Est @ 2.64% | Est @ 2.57% |
Present Value (A$, Millions) Discounted @ 7.4% | AU$656 | AU$719 | AU$811 | AU$787 | AU$758 | AU$727 | AU$697 | AU$667 | AU$637 | AU$609 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$7.1b
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 a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) 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 7.4%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$1.2b× (1 + 2.4%) ÷ (7.4%– 2.4%) = AU$26b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$26b÷ ( 1 + 7.4%)10= AU$13b
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$20b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$37.0, the company appears a touch undervalued at a 23% 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
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 these inputs, I recommend redoing the calculations yourself and playing with them. 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 Seven Group Holdings 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 7.4%, which is based on a levered beta of 1.203. 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 Seven Group Holdings
- Debt is well covered by earnings and cashflows.
- Dividend is low compared to the top 25% of dividend payers in the Trade Distributors market.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Australian market.
- Good value based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow slower than the Australian market.
Next Steps:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Seven Group Holdings, we've compiled three essential factors you should assess:
- Risks: Take risks, for example - Seven Group Holdings has 2 warning signs we think you should be aware of.
- Future Earnings: How does SVW'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.
- 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 Australian stock every day, so if you want to find the intrinsic value of any other stock just search here.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About ASX:SVW
Seven Group Holdings
Engages in the heavy equipment sales and service, equipment hire, construction materials, media, broadcasting, and energy assets businesses.