How far is the public joint stock company Polyus (MCX: PLZL) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock’s price is fair by projecting its future cash flows and then discounting them to present value. We will therefore take advantage of the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. If you still have burning questions about this type of assessment, take a look at the Simply Wall St analysis model.
See our latest review for Polyus
Is Polyus valued enough?
We use what is called a 2-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for 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 the last reported value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) estimate
|Levered FCF ($, million)||$ 1.81 billion||2.42 billion USD||USD 2.23 billion||US $ 2.71 billion||2.97 billion USD||3.21 billion USD||3.46 billion USD||US $ 3.72 billion||4.01 billion USD||4.31 billion USD|
|Source of estimated growth rate||Analyst x6||Analyst x7||Analyst x5||Analyst x2||Analyst x1||Is @ 7.99%||Is 7.82%||Is 7.71%||Is 7.63%||Is 7.57%|
|Present value ($, millions) discounted at 15%||US $ 1.6k||US $ 1.8K||US $ 1.5k||US $ 1.5k||US $ 1.5k||US $ 1.4K||US $ 1.3k||US $ 1.2K||US $ 1.1K||US $ 1.1K|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 14 billion USD
The second stage is also known as terminal value, it is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 7.4%. We discount terminal cash flows to their present value at a cost of equity of 15%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = $ 4.3 billion × (1 + 7.4%) ÷ (15% – 7.4%) = $ 61 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= $ 61 billion ÷ (1 + 15%)ten= 15 billion USD
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is US $ 29 billion. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of 16,000, the company is around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
We draw your attention to the fact that the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the 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 complete picture of a company’s potential performance. Since we view Polyus 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 debt into account. In this calculation, we used 15%, which is based on a leveraged beta of 1.115. Beta is a measure of the volatility of a stock, relative to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
To move on:
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 business. DCF models are not the alpha and omega 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 undervaluation or overvaluation of the company. If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For Polyus, we have put together three relevant elements to consider:
- Risks: To this end, you should be aware of the 3 warning signs we spotted with Polyus.
- Future income: How does PLZL’s growth rate compare to its peers and to the market in general? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high quality inventory 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 MISX share. If you want to find the calculation for other actions, just search here.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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