Are Investors Undervaluing MNF Group Limited (ASX:MNF) By 37%?

In this article we are going to estimate the intrinsic value of MNF Group Limited (ASX:MNF) by taking the expected future cash flows and discounting them to today's value. This is done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for MNF 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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) estimate

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Levered FCF (A$, Millions)

AU$15.3m

AU$18.2m

AU$22.2m

AU$25.1m

AU$27.5m

AU$29.4m

AU$30.9m

AU$32.2m

AU$33.1m

AU$34.0m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Analyst x2

Est @ 13.08%

Est @ 9.48%

Est @ 6.96%

Est @ 5.2%

Est @ 3.96%

Est @ 3.1%

Est @ 2.49%

Present Value (A$, Millions) Discounted @ 5.4%

AU$14.5

AU$16.4

AU$18.9

AU$20.3

AU$21.1

AU$21.4

AU$21.4

AU$21.1

AU$20.6

AU$20.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$195m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 1.1%. We discount the terminal cash flows to today's value at a cost of equity of 5.4%.

Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = AU$34m× (1 + 1.1%) ÷ 5.4%– 1.1%) = AU$789m