A Look At The Intrinsic Value Of South Port New Zealand Limited (NZSE:SPN)

How far off is South Port New Zealand Limited (NZSE:SPN) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today’s value. This is 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.

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View our latest analysis for South Port New Zealand

Crunching the numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with, we need to estimate the next ten years of cash flows. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) estimate

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Levered FCF (NZ$, Millions) NZ$7.52 NZ$8.16 NZ$8.70 NZ$9.16 NZ$9.57 NZ$9.94 NZ$10.27 NZ$10.59 NZ$10.89 NZ$11.19
Growth Rate Estimate Source Est @ 11.04% Est @ 8.44% Est @ 6.62% Est @ 5.34% Est @ 4.45% Est @ 3.83% Est @ 3.39% Est @ 3.08% Est @ 2.87% Est @ 2.72%
Present Value (NZ$, Millions) Discounted @ 8.22% NZ$6.95 NZ$6.96 NZ$6.86 NZ$6.68 NZ$6.45 NZ$6.19 NZ$5.91 NZ$5.63 NZ$5.35 NZ$5.08

Present Value of 10-year Cash Flow (PVCF)= NZ$62.06m

“Est” = FCF growth rate estimated by Simply Wall St

After calculating the present value of future cash flows in the intial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 8.2%.

Terminal Value (TV) = FCF2029 × (1 + g) ÷ (r – g) = NZ$11m × (1 + 2.4%) ÷ (8.2% – 2.4%) = NZ$196m

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = NZ$NZ$196m ÷ ( 1 + 8.2%)10 = NZ$88.88m

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$150.93m. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value estimate of NZ$5.75. Relative to the current share price of NZ$6.75, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.

NZSE:SPN Intrinsic value, May 27th 2019
NZSE:SPN Intrinsic value, May 27th 2019

Important 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. 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 South Port New Zealand 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 8.2%, which is based on a levered beta of 0.982. 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.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/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. For South Port New Zealand, I’ve compiled three important factors you should further examine:

  1. Financial Health: Does SPN 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. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of SPN? 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 updates its DCF calculation for every NZ stock every day, so if you want to find the intrinsic value of any other stock just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.