Does the share price for Xenith IP Group Limited (ASX:XIP) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for Xenith IP Group here.

Crunching the numbers

We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I pulled together the analyst consensus estimates of XIP’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 10.98%. 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 A$52M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.

The infographic above illustrates how XIP’s earnings are expected to move in the future, which should give you an idea of XIP’s outlook. Then, I calculate 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 perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of A$117M.

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 A$168M. 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$1.92, which, compared to the current share price of A$1.28, we find that Xenith IP Group is quite good value at a 33.30% discount to what it is available for right now.

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 XIP, there are three important factors you should further research:

PS. Simply Wall St does a DCF calculation for every AU stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.