- Metals and Mining
Estimating The Fair Value Of Imdex Limited (ASX:IMD)
- Imdex's estimated fair value is AU$2.04 based on 2 Stage Free Cash Flow to Equity
- Imdex's AU$2.10 share price indicates it is trading at similar levels as its fair value estimate
- Analyst price target for IMD is AU$2.77, which is 36% above our fair value estimate
Does the March share price for Imdex Limited (ASX:IMD) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for Imdex
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF (A$, Millions)||-AU$183.1m||AU$69.4m||AU$80.6m||AU$89.1m||AU$91.8m||AU$94.1m||AU$96.3m||AU$98.4m||AU$100.5m||AU$102.6m|
|Growth Rate Estimate Source||Analyst x3||Analyst x3||Analyst x3||Analyst x1||Analyst x1||Est @ 2.50%||Est @ 2.33%||Est @ 2.21%||Est @ 2.13%||Est @ 2.07%|
|Present Value (A$, Millions) Discounted @ 8.6%||-AU$169||AU$58.9||AU$63.0||AU$64.1||AU$60.9||AU$57.5||AU$54.2||AU$51.0||AU$48.0||AU$45.1|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$334m
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 (1.9%) 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 8.6%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = AU$103m× (1 + 1.9%) ÷ (8.6%– 1.9%) = AU$1.6b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$1.6b÷ ( 1 + 8.6%)10= AU$692m
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$1.0b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$2.1, the company appears around fair value at the time of writing. 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 calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 8.6%, which is based on a levered beta of 1.117. 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 Imdex
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Earnings growth over the past year underperformed the Metals and Mining industry.
- Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
- Expensive based on P/E ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Australian market.
- Revenue is forecast to grow slower than 20% per year.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Imdex, we've compiled three essential items you should explore:
- Risks: Be aware that Imdex is showing 1 warning sign in our investment analysis , you should know about...
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for IMD's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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 Imdex 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.View the Free Analysis
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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.
Imdex Limited, together with its subsidiaries, provides drilling optimization products and sensors for the minerals industry in the Asia-Pacific, Africa, Europe, and the Americas.
Excellent balance sheet with moderate growth potential.