Stock Analysis

A Look At The Intrinsic Value Of Public Joint Stock Company Novorossiysk Commercial Sea Port (MCX:NMTP)

MISX:NMTP
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Today we will run through one way of estimating the intrinsic value of Public Joint Stock Company Novorossiysk Commercial Sea Port (MCX:NMTP) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Novorossiysk Commercial Sea Port

What's the estimated valuation?

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

10-year free cash flow (FCF) forecast

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Levered FCF ($, Millions) US$249.4m US$246.7m US$250.6m US$259.0m US$271.2m US$286.3m US$304.1m US$324.4m US$346.9m US$371.9m
Growth Rate Estimate Source Est @ -4.85% Est @ -1.09% Est @ 1.55% Est @ 3.39% Est @ 4.68% Est @ 5.58% Est @ 6.22% Est @ 6.66% Est @ 6.97% Est @ 7.18%
Present Value ($, Millions) Discounted @ 19% US$210 US$175 US$150 US$131 US$115 US$103 US$92.0 US$82.8 US$74.6 US$67.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.2b

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 7.7%. We discount the terminal cash flows to today's value at a cost of equity of 19%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$372m× (1 + 7.7%) ÷ (19%– 7.7%) = US$3.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.7b÷ ( 1 + 19%)10= US$665m

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 US$1.9b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of ₽7.6, the company appears about fair value at a 2.4% 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
MISX:NMTP Discounted Cash Flow April 8th 2021

The assumptions

Now 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 Novorossiysk Commercial Sea Port 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 19%, which is based on a levered beta of 1.292. 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.

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Novorossiysk Commercial Sea Port, we've put together three essential aspects you should further research:

  1. Risks: Case in point, we've spotted 3 warning signs for Novorossiysk Commercial Sea Port you should be aware of.
  2. Future Earnings: How does NMTP'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: 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!

PS. Simply Wall St updates its DCF calculation for every Russian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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Valuation is complex, but we're helping make it simple.

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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. 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.
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About MISX:NMTP

Novorossiysk Commercial Sea Port

Public Joint Stock Company Novorossiysk Commercial Sea Port, together with its subsidiaries, provides stevedoring, port, and sea vessel services in Russia.

Excellent balance sheet and fair value.

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