In this article I am going to calculate the intrinsic value of Saracen Mineral Holdings Limited (ASX:SAR) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not October 2018 then I highly recommend you check out the latest calculation for Saracen Mineral Holdings by following the link below.
See our latest analysis for Saracen Mineral Holdings
Step by step through the calculation
I’m using the 2-stage growth 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 with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow estimate
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (A$, Millions) | A$102.90 | A$170.00 | A$199.50 | A$233.42 | A$270.76 |
| Source | Analyst x3 | Analyst x2 | Analyst x2 | Est @ 17%, capped from 20.42% | Est @ 16%, capped from 20.42% |
| Present Value Discounted @ 9.86% | A$93.67 | A$140.86 | A$150.48 | A$160.26 | A$169.23 |
Present Value of 5-year Cash Flow (PVCF)= AU$715m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.9%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = AU$271m × (1 + 2.8%) ÷ (9.9% – 2.8%) = AU$3.9b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$3.9b ÷ ( 1 + 9.9%)5 = AU$2.5b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$3.2b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of A$3.87. Compared to the current share price of A$2, the stock is quite undervalued at a 48% discount to what it is available for right now.