Cedar Woods Properties Limited's (ASX:CWP) Intrinsic Value Is Potentially 18% Below Its Share Price

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editorial-team@simplywallst.com (Simply Wall St)

Tue, Oct 22, 2024, 9:32 PM 6 min read

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Cedar Woods Properties Limited (ASX:CWP) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be 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.

See our latest analysis for Cedar Woods Properties

Is Cedar Woods Properties Fairly Valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. 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) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (A$, Millions)	AU$32.8m	AU$35.5m	AU$22.9m	AU$22.1m	AU$21.8m	AU$21.7m	AU$21.8m	AU$22.0m	AU$22.3m	AU$22.7m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x1	Est @ -3.35%	Est @ -1.62%	Est @ -0.41%	Est @ 0.43%	Est @ 1.03%	Est @ 1.44%	Est @ 1.73%
Present Value (A$, Millions) Discounted @ 7.6%	AU$30.4	AU$30.6	AU$18.4	AU$16.5	AU$15.1	AU$14.0	AU$13.1	AU$12.3	AU$11.6	AU$10.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$173m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (2.4%) 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 7.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = AU$23m× (1 + 2.4%) ÷ (7.6%– 2.4%) = AU$451m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= AU$451m÷ ( 1 + 7.6%)¹⁰= AU$217m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$390m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of AU$5.8, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf — ASX:CWP Discounted Cash Flow October 23rd 2024

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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Cedar Woods Properties 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 7.6%, which is based on a levered beta of 1.251. 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.

SWOT Analysis for Cedar Woods Properties

Strength

Earnings growth over the past year exceeded the industry.

Debt is not viewed as a risk.

Dividends are covered by earnings and cash flows.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Real Estate market.

Opportunity

Annual earnings are forecast to grow faster than the Australian market.

Good value based on P/E ratio compared to estimated Fair P/E ratio.

Threat

Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For Cedar Woods Properties, we've put together three pertinent elements you should further examine:

Risks: To that end, you should be aware of the 2 warning signs we've spotted with Cedar Woods Properties .
Future Earnings: How does CWP'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.
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 Australian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.