- Metals and Mining
Mineral Resources Limited's (ASX:MIN) Intrinsic Value Is Potentially 35% Above Its Share Price
- The projected fair value for Mineral Resources is AU$107 based on 2 Stage Free Cash Flow to Equity
- Current share price of AU$79.83 suggests Mineral Resources is potentially 26% undervalued
- Analyst price target for MIN is AU$94.40 which is 12% below our fair value estimate
Does the March share price for Mineral Resources Limited (ASX:MIN) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Mineral Resources
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF (A$, Millions)||-AU$557.0m||AU$770.3m||AU$1.33b||AU$1.16b||AU$1.49b||AU$1.67b||AU$1.82b||AU$1.95b||AU$2.05b||AU$2.14b|
|Growth Rate Estimate Source||Analyst x3||Analyst x7||Analyst x7||Analyst x5||Analyst x5||Est @ 12.21%||Est @ 9.12%||Est @ 6.97%||Est @ 5.45%||Est @ 4.40%|
|Present Value (A$, Millions) Discounted @ 9.1%||-AU$511||AU$647||AU$1.0k||AU$818||AU$962||AU$990||AU$990||AU$971||AU$939||AU$899|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$7.7b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = AU$2.1b× (1 + 1.9%) ÷ (9.1%– 1.9%) = AU$31b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$31b÷ ( 1 + 9.1%)10= AU$13b
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$21b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$79.8, the company appears a touch undervalued at a 26% 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 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 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 Mineral Resources 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 9.1%, which is based on a levered beta of 1.204. 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 Mineral Resources
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
- Annual revenue is forecast to grow faster than the Australian market.
- Trading below our estimate of fair value by more than 20%.
- Paying a dividend but company has no free cash flows.
- Annual earnings are forecast to grow slower than the Australian market.
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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. 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. Why is the intrinsic value higher than the current share price? For Mineral Resources, we've compiled three pertinent items you should further research:
- Risks: As an example, we've found 2 warning signs for Mineral Resources (1 is a bit concerning!) that you need to consider before investing here.
- Future Earnings: How does MIN'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Mineral Resources 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.
Mineral Resources Limited, together with subsidiaries, operates as a mining services company in Australia, China, Singapore, and internationally.
Adequate balance sheet second-rate dividend payer.