Investors Are Undervaluing SITO Mobile Ltd (NASDAQ:SITO) By 43%

How far off is SITO Mobile Ltd (NASDAQ:SITO) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today’s value. I will be using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not May 2018 then I highly recommend you check out the latest calculation for SITO Mobile by following the link below. See our latest analysis for SITO Mobile

The calculation

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 begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2018 2019 2020 2021 2022
Levered FCF ($, Millions) $-2.48 $-0.24 $3.29 $8.80 $15.99
Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Analyst x1
Present Value Discounted @ 9.38% $-2.27 $-0.20 $2.51 $6.15 $10.21

Present Value of 5-year Cash Flow (PVCF)= $16

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond 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 (2.5%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.4%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = $16 × (1 + 2.5%) ÷ (9.4% – 2.5%) = $237

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = $237 / ( 1 + 9.4%)5 = $151

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $168. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $6.68, which, compared to the current share price of $3.79, we see that SITO Mobile is quite good value at a 43.25% discount to what it is available for right now.

NasdaqCM:SITO Intrinsic Value May 14th 18
NasdaqCM:SITO Intrinsic Value May 14th 18

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at SITO Mobile 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 9.4%, which is based on a levered beta of 0.918. 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. What is the reason for the share price to differ from the intrinsic value? For SITO, there are three fundamental aspects you should further examine:

  1. Financial Health: Does SITO 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 SITO’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 SITO? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.