In This Article:
In this article I am going to calculate the intrinsic value of SKYCITY Entertainment Group Limited (NZSE:SKC) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not November 2018 then I highly recommend you check out the latest calculation for SKYCITY Entertainment Group by following the link below.
View our latest analysis for SKYCITY Entertainment Group
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 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 forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (NZ$, Millions) | NZ$-131.07 | NZ$85.80 | NZ$144.95 | NZ$150.10 | NZ$155.44 |
| Source | Analyst x3 | Analyst x3 | Analyst x2 | Est @ 3.55% | Est @ 3.55% |
| Present Value Discounted @ 9.01% | NZ$-120.24 | NZ$72.21 | NZ$111.90 | NZ$106.30 | NZ$100.99 |
Present Value of 5-year Cash Flow (PVCF)= NZ$271m
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. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 5%. We discount this to today’s value at a cost of equity of 9%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = NZ$155m × (1 + 5%) ÷ (9% – 5%) = NZ$4.1b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = NZ$4.1b ÷ ( 1 + 9%)5 = NZ$2.7b
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 NZ$2.9b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of NZ$4.35. Compared to the current share price of NZ$3.71, the stock is about right, perhaps slightly undervalued at a 15% discount to what it is available for right now.