Estimated Intrinsic Value of Ace Integrated Solutions Limited (NSE:ACEINTEG)
Today we are going to walk through one way to estimate the intrinsic value of Ace Integrated Solutions Limited (NSE:ACEINTEG) by projecting its future cash flows and then discounting them to present value. One way to do this is to use the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Check out our latest analysis for Ace Integrated Solutions
The calculation
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported 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 more in early years than in later years.
Generally, 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
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF (₹, million) | ₹22.6 million | ₹25.6 million | ₹28.6 million | ₹31.5 million | ₹34.4 million | ₹37.3 million | ₹40.2 million | ₹43.3 million | ₹46.4 million | ₹49.7 million |
Growth rate estimate Source | Is at 16.58% | Is at 13.63% | Is at 11.57% | Is at 10.12% | Is at 9.11% | Is at 8.4% | Is at 7.91% | Is at 7.56% | Is at 7.32% | Is at 7.15% |
Present value (₹, million) discounted at 13% | ₹19.9 | ₹20.0 | ₹19.7 | ₹19.1 | ₹18.4 | ₹17.6 | ₹16.8 | ₹15.9 | ₹15.1 | ₹14.3 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) =₹176m
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. 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 (6.8%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 13%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = ₹50m × (1 + 6.8%) ÷ (13%–6.8%) = ₹809m
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= ₹809m÷ ( 1 + 13%)^{ten}=₹232m
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is ₹408 million. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of ₹33.6, the company appears to be roughly fair value at a 16% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
Important assumptions
We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Ace Integrated Solutions 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 factors in debt. In this calculation, we used 13%, which is based on a leveraged beta of 1.022. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Look forward:
While important, calculating DCF shouldn’t be the only metric to consider when researching a business. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different pace, or if its cost of equity or risk-free rate changes sharply, output may be very different. For Ace Integrated Solutions, we’ve compiled three additional things you should explore:
- Risks: Every business has them, and we’ve spotted 4 warning signs for Ace Integrated Solutions (including 2 a little unpleasant!) to know.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
- Other environmentally friendly businesses: Are you concerned about the environment and do you think that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies thinking about a greener future to discover actions you might not have thought of!
PS. The Simply Wall St app performs an updated cash flow valuation for each NSEI stock each day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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