A Look At The Intrinsic Value Of Nasstar plc (LON:NASA)

In this article I am going to calculate the intrinsic value of Nasstar plc (AIM:NASA) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in March 2018 so be sure check out the updated calculation by following the link below. View our latest analysis for Nasstar

The calculation

I’m 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 perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2018 2019 2020 2021 2022
Levered FCF (£, Millions) £3.10 £3.69 £4.35 £5.09 £5.91
Source Analyst x1 Extrapolated @ (19%, capped from 35.73%) Extrapolated @ (18%, capped from 35.73%) Extrapolated @ (17%, capped from 35.73%) Extrapolated @ (16%, capped from 35.73%)
Present Value Discounted @ 8.71% £2.85 £3.12 £3.39 £3.65 £3.89

Present Value of 5-year Cash Flow (PVCF)= £17

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 the GDP. In this case I have used the 10-year government bond rate (1.5%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.7%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = £6 × (1 + 1.5%) ÷ (8.7% – 1.5%) = £83

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = £83 / ( 1 + 8.7%)5 = £55

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £72. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of £0.12, which, compared to the current share price of £0.105, we find that Nasstar is about right, perhaps slightly undervalued at a 15.78% discount to what it is available for right now.

AIM:NASA Intrinsic Value Mar 19th 18
AIM:NASA Intrinsic Value Mar 19th 18

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Nasstar as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.7%, which is based on a levered beta of 0.848. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For NASA, I’ve put together three key aspects you should further research:

  1. Financial Health: Does NASA 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. Future Earnings: How does NASA’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.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of NASA? 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 does a DCF calculation for every GB stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.