Does the share price for Cleanaway Waste Management Limited (ASX:CWY) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after March 2018 then I highly recommend you check out the latest calculation for Cleanaway Waste Management here.

Crunching the numbers

I will be using the 2-stage growth 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, I use the analyst consensus estimates of CWY’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.55%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of AU$363.83M. Keen to understand how I arrived at this number? Check out our detailed analysis here.

The infographic above illustrates how CWY’s earnings are expected to move going forward, which should give you some color on CWY’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes AU$1.79B.

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 AU$2.15B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of A$1.06, which, compared to the current share price of A$1.485, we find that Cleanaway Waste Management is rather overvalued and not available at a discount at this time.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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 CWY, I’ve compiled three important aspects you should look at: