- New Zealand
Is Auckland International Airport Limited (NZSE:AIA) Expensive For A Reason? A Look At Its Intrinsic Value
- The projected fair value for Auckland International Airport is NZ$6.53 based on 2 Stage Free Cash Flow to Equity
- Current share price of NZ$8.57 suggests Auckland International Airport is potentially 31% overvalued
- Analyst price target for AIA is NZ$8.11, which is 24% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Auckland International Airport Limited (NZSE:AIA) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Auckland International Airport
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF (NZ$, Millions)||-NZ$106.9m||NZ$432.4m||NZ$491.6m||NZ$512.1m||NZ$542.4m||NZ$562.5m||NZ$580.7m||NZ$597.6m||NZ$613.7m||NZ$629.3m|
|Growth Rate Estimate Source||Est @ 4.35%||Analyst x1||Analyst x1||Analyst x1||Analyst x1||Est @ 3.70%||Est @ 3.24%||Est @ 2.92%||Est @ 2.69%||Est @ 2.54%|
|Present Value (NZ$, Millions) Discounted @ 7.2%||-NZ$99.8||NZ$377||NZ$399||NZ$388||NZ$384||NZ$371||NZ$358||NZ$344||NZ$329||NZ$315|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NZ$3.2b
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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = NZ$629m× (1 + 2.2%) ÷ (7.2%– 2.2%) = NZ$13b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$13b÷ ( 1 + 7.2%)10= NZ$6.4b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is NZ$9.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of NZ$8.6, the company appears potentially overvalued 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. 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 Auckland International Airport 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 7.2%, which is based on a levered beta of 0.841. 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 Auckland International Airport
- Net debt to equity ratio below 40%.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the New Zealander market.
- Debt is not well covered by operating cash flow.
- Revenue is forecast to grow slower than 20% per year.
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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Auckland International Airport, we've put together three relevant items you should explore:
- Risks: To that end, you should be aware of the 2 warning signs we've spotted with Auckland International Airport .
- Future Earnings: How does AIA'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. Simply Wall St updates its DCF calculation for every New Zealander 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 Auckland International Airport 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.
Auckland International Airport
Auckland International Airport Limited provides airport facilities, supporting infrastructure, and aeronautical services in Auckland, New Zealand.
Reasonable growth potential with imperfect balance sheet.