Does the share price for Gentrack Group Limited (NZSE:GTK) 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. Also note that this article was written in January 2018 so be sure check the latest calculation for Gentrack Group here.
What’s the value?
I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To begin, I pulled together the analyst consensus estimates of GTK’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.44%. 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 NZ$111.6M. Want to know how I arrived at this number? Check out our detailed analysis here.
The infographic above illustrates how GTK’s earnings are expected to move going forward, which should give you an idea of GTK’s outlook. Next, 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 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 NZ$392.3M.
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 NZ$503.9M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of NZ$6.02, which, compared to the current share price of NZ$6.63, we find that Gentrack Group is fair value, maybe slightly overvalued at the time of writing.
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.
For GTK, there are three essential factors you should further research:
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1. Financial Health: Does GTK have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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2. Future Earnings: How does GTK’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
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2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of GTK? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!