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Are Investors Undervaluing Sandfire Resources Limited (ASX:SFR) By 44%?

In This Article:

Key Insights

  • The projected fair value for Sandfire Resources is AU$16.57 based on 2 Stage Free Cash Flow to Equity

  • Sandfire Resources is estimated to be 44% undervalued based on current share price of AU$9.28

  • Analyst price target for SFR is US$10.50 which is 37% below our fair value estimate

Does the December share price for Sandfire Resources Limited (ASX:SFR) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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 Sandfire Resources

Step By Step Through The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$270.1m

US$371.7m

US$436.0m

US$484.9m

US$261.0m

US$249.7m

US$244.1m

US$242.1m

US$242.6m

US$244.9m

Growth Rate Estimate Source

Analyst x6

Analyst x6

Analyst x6

Analyst x4

Analyst x1

Est @ -4.32%

Est @ -2.25%

Est @ -0.80%

Est @ 0.21%

Est @ 0.92%

Present Value ($, Millions) Discounted @ 7.4%

US$252

US$322

US$352

US$364

US$183

US$163

US$148

US$137

US$128

US$120

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.2b