Stock Analysis

Estimating The Intrinsic Value Of Milton Industries Limited (NSE:MILTON)

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NSEI:MILTON
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Key Insights

  • The projected fair value for Milton Industries is ₹21.57 based on 2 Stage Free Cash Flow to Equity
  • Milton Industries' ₹19.35 share price indicates it is trading at similar levels as its fair value estimate
  • The average premium for Milton Industries' competitorsis currently 1,289%

Does the March share price for Milton Industries Limited (NSE:MILTON) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Milton Industries

The Model

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (₹, Millions) ₹60.0m ₹61.1m ₹63.1m ₹65.9m ₹69.2m ₹73.1m ₹77.5m ₹82.3m ₹87.6m ₹93.3m
Growth Rate Estimate Source Est @ -0.28% Est @ 1.84% Est @ 3.33% Est @ 4.38% Est @ 5.11% Est @ 5.62% Est @ 5.98% Est @ 6.23% Est @ 6.40% Est @ 6.52%
Present Value (₹, Millions) Discounted @ 22% ₹49.3 ₹41.3 ₹35.2 ₹30.2 ₹26.1 ₹22.7 ₹19.8 ₹17.3 ₹15.1 ₹13.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹270m

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 6.8%. We discount the terminal cash flows to today's value at a cost of equity of 22%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₹93m× (1 + 6.8%) ÷ (22%– 6.8%) = ₹677m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹677m÷ ( 1 + 22%)10= ₹96m

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 ₹367m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₹19.4, the company appears about fair value at a 10% 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.

dcf
NSEI:MILTON Discounted Cash Flow March 18th 2023

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Milton Industries 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 22%, which is based on a levered beta of 1.513. 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 Milton Industries

Strength
  • Earnings growth over the past year exceeded its 5-year average.
  • Debt is not viewed as a risk.
Weakness
  • Earnings growth over the past year underperformed the Forestry industry.
Opportunity
  • Current share price is below our estimate of fair value.
  • Lack of analyst coverage makes it difficult to determine MILTON's earnings prospects.
Threat
  • No apparent threats visible for MILTON.

Next Steps:

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. It's not possible to obtain a foolproof valuation with a DCF model. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Milton Industries, we've put together three relevant aspects you should explore:

  1. Risks: You should be aware of the 3 warning signs for Milton Industries (2 are concerning!) we've uncovered before considering an investment in the company.
  2. 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!
  3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI every day. If you want to find the calculation for other stocks just search here.

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