In This Article:
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of The Star Entertainment Group Limited (ASX:SGR) as an investment opportunity. 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. If you are reading this after May 2018 then I highly recommend you check out the latest calculation for Star Entertainment Group here.
What’s the value?
We are going to use a two-stage DCF 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. Firstly, I pulled together the analyst consensus forecast of SGR’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.55%. 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 AU$795.13M. Want to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how SGR’s top and bottom lines are expected to move in the future, which should give you some color on SGR’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes AU$3.97B.
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 AU$4.76B. 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$5.19, which, compared to the current share price of A$5.33, we see that Star Entertainment Group is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For SGR, I’ve compiled three fundamental aspects you should further examine:
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Financial Health: Does SGR 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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Future Earnings: How does SGR’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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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of SGR? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!