Does the share price for Trustpower Limited (NZSE:TPW) 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. If you are reading this after April 2018 then I highly recommend you check out the latest calculation for Trustpower here.
What’s the value?
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. Firstly, I use the analyst consensus forecast of TPW’s levered free cash flow (FCF) over the next five years and discounted these values 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 NZ$630.15M. Keen to know how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how TPW’s top and bottom lines are expected to move in the future, which should give you an idea of TPW’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the steady 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 NZ$2.00B.
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$2.63B. 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$8.40, which, compared to the current share price of NZ$5.78, we see that Trustpower is quite undervalued at a 31.18% 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 TPW, I’ve put together three pertinent aspects you should look at:
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Financial Health: Does TPW 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 TPW’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 TPW? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!