Stock Analysis

A Look At The Intrinsic Value Of MNF Group Limited (ASX:MNF)

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ASX:SYM
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Today we will run through one way of estimating the intrinsic value of MNF Group Limited (ASX:MNF) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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 MNF Group

The calculation

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 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Levered FCF (A$, Millions) AU$17.3m AU$17.9m AU$19.9m AU$19.7m AU$19.7m AU$19.9m AU$20.1m AU$20.3m AU$20.7m AU$21.0m
Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x2 Est @ -0.72% Est @ 0.1% Est @ 0.67% Est @ 1.07% Est @ 1.35% Est @ 1.55% Est @ 1.69%
Present Value (A$, Millions) Discounted @ 6.2% AU$16.3 AU$15.8 AU$16.6 AU$15.5 AU$14.6 AU$13.8 AU$13.2 AU$12.6 AU$12.0 AU$11.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$141m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.2%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = AU$21m× (1 + 2.0%) ÷ (6.2%– 2.0%) = AU$512m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$512m÷ ( 1 + 6.2%)10= AU$281m

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$422m. 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$5.7, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
ASX:MNF Discounted Cash Flow April 19th 2021

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. 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 MNF Group 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 6.2%, which is based on a levered beta of 0.800. 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.

Moving On:

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. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For MNF Group, there are three fundamental factors you should further research:

  1. Risks: Take risks, for example - MNF Group has 2 warning signs we think you should be aware of.
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for MNF'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.

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