Stock Analysis

Calculating The Intrinsic Value Of Corporate Travel Management Limited (ASX:CTD)

ASX:CTD
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Corporate Travel Management fair value estimate is AU$22.69
  • Corporate Travel Management's AU$19.08 share price indicates it is trading at similar levels as its fair value estimate
  • Our fair value estimate is 3.6% higher than Corporate Travel Management's analyst price target of AU$21.89

In this article we are going to estimate the intrinsic value of Corporate Travel Management Limited (ASX:CTD) by estimating the company's 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. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

Check out our latest analysis for Corporate Travel Management

The Model

We're 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 a stable growth rate. 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

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (A$, Millions) AU$190.8m AU$187.8m AU$193.8m AU$191.1m AU$196.3m AU$199.1m AU$202.4m AU$206.0m AU$209.8m AU$213.9m
Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x4 Analyst x2 Analyst x2 Est @ 1.45% Est @ 1.64% Est @ 1.77% Est @ 1.86% Est @ 1.93%
Present Value (A$, Millions) Discounted @ 7.5% AU$177 AU$163 AU$156 AU$143 AU$137 AU$129 AU$122 AU$116 AU$110 AU$104

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$1.4b

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 (2.1%) 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 7.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = AU$214m× (1 + 2.1%) ÷ (7.5%– 2.1%) = AU$4.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$4.0b÷ ( 1 + 7.5%)10= AU$2.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$3.3b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of AU$19.1, the company appears about fair value at a 16% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
ASX:CTD Discounted Cash Flow December 14th 2023

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. 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 Corporate Travel Management 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 7.5%, which is based on a levered beta of 1.082. 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 Corporate Travel Management

Strength
  • Earnings growth over the past year exceeded the industry.
  • Currently debt free.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
Opportunity
  • Annual earnings are forecast to grow faster than the Australian market.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for 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 Corporate Travel Management, there are three important aspects you should explore:

  1. Financial Health: Does CTD 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.
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for CTD's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Corporate Travel Management is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.