A look at the intrinsic value of Blackmores Limited (ASX: BKL)
Today we’re going to go over one way to estimate the intrinsic value of Blackmores Limited (ASX: BKL) by taking the company’s future cash flow forecast and discounting it to today’s value. . To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
We generally think of a business’s value as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
Check out our latest analysis for Blackmores
The model
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. In the first step, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, 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
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (A $, Millions) | 40.1 million Australian dollars | AU $ 56.7 million | AU $ 69.3 million | A $ 72.0 million | 74.2 million Australian dollars | 76.2 million Australian dollars | 78.1 million Australian dollars | 79.9 million Australian dollars | AU $ 81.6 million | AU $ 83.4 million |
Source of estimated growth rate | Analyst x3 | Analyst x3 | Analyst x2 | Analyst x1 | East @ 3.05% | East @ 2.71% | East @ 2.47% | East @ 2.31% | Est @ 2.19% | Est @ 2.11% |
Present value (A $, Millions) discounted at 6.5% | A $ 37.7 | A $ 50.0 | A $ 57.4 | A $ 56.0 | A $ 54.2 | A $ 52.3 | AU $ 50.3 | A $ 48.3 | A $ 46.4 | A $ 44.5 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 497 million Australian dollars
The second stage is also known as terminal value, this is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. Similar to the 10-year â€œgrowthâ€ period, we discount future cash flows to their present value, using a cost of equity of 6.5%.
Terminal value (TV)= FCF_{2031} Ã— (1 + g) Ã· (r – g) = AU $ 83 million Ã— (1 + 1.9%) Ã· (6.5% to 1.9%) = AU $ 1.9 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= AU $ 1.9b Ã· (1 + 6.5%)^{ten}= AU $ 994 million
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is AU $ 1.5 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of A $ 76.4, the company appears to be roughly at fair value with a 0.7% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
We would like to stress that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Blackmores as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes into account debt. In this calculation, we used 6.5%, which is based on a leveraged beta of 0.966. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
To move on :
Valuation is only one side of the coin in terms of building your investment thesis, and ideally, it won’t be the only piece of analysis you will look at for a business. DCF models are not the ultimate solution for investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Blackmores, we’ve compiled three essential aspects that you should take a look at:
- Risks: Take risks, for example – Blackmores has 2 warning signs we think you should be aware.
- Future benefits: How does BKL’s growth rate compare with that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each ASX share. If you want to find the calculation for other actions, do a search here.
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