Calculating The Fair Value Of Integral Diagnostics Limited (ASX:IDX)

In This Article:

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Integral Diagnostics fair value estimate is AU$2.37

  • With AU$2.72 share price, Integral Diagnostics appears to be trading close to its estimated fair value

  • Our fair value estimate is 26% higher than Integral Diagnostics' analyst price target of AU$2.98

Today we will run through one way of estimating the intrinsic value of Integral Diagnostics Limited (ASX:IDX) by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Integral Diagnostics

The Model

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, 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) estimate

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF (A$, Millions)

AU$27.2m

AU$37.2m

AU$45.4m

AU$29.9m

AU$35.6m

AU$34.4m

AU$33.9m

AU$33.7m

AU$33.7m

AU$33.9m

Growth Rate Estimate Source

Analyst x4

Analyst x4

Analyst x3

Analyst x1

Analyst x1

Est @ -3.24%

Est @ -1.69%

Est @ -0.60%

Est @ 0.16%

Est @ 0.69%

Present Value (A$, Millions) Discounted @ 7.4%

AU$25.3

AU$32.3

AU$36.7

AU$22.5

AU$25.0

AU$22.5

AU$20.6

AU$19.1

AU$17.8

AU$16.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$238m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.4%.