Does the December share price for Boral Limited (ASX:BLD) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value 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 December 2018 then I highly recommend you check out the latest calculation for Boral by following the link below.
View our latest analysis for Boral
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. In the first stage we need to estimate the cash flows to the business over the next five years. 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
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (A$, Millions) | A$570.33 | A$646.00 | A$716.33 | A$738.51 | A$761.38 |
| Source | Analyst x3 | Analyst x3 | Analyst x3 | Est @ 3.1% | Est @ 3.1% |
| Present Value Discounted @ 8.58% | A$525.28 | A$547.98 | A$559.64 | A$531.40 | A$504.58 |
Present Value of 5-year Cash Flow (PVCF)= AU$2.7b
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 the GDP. In this case I have used the 10-year government bond rate (2.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.6%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = AU$761m × (1 + 2.8%) ÷ (8.6% – 2.8%) = AU$13b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$13b ÷ ( 1 + 8.6%)5 = AU$8.9b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$12b. 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 A$9.9. Compared to the current share price of A$4.99, the stock is quite undervalued at a 50% discount to what it is available for right now.