A Look At The Fair Value Of Vmoto Limited (ASX:VMT)
In this article, we're going to estimate the intrinsic value of Vmoto Limited (ASX: VMT) by calculating the company's forecast future cash flows back to today's value. On this occasion we use the DCF (Discounted Cash Flow) model. Before you think you can't understand it, just keep reading! It's actually a lot less complex than you can imagine.
Remember, however, that there are many ways to appreciate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, you can read in detail the reasons behind this calculation in the Simply Wall St analytical model.
Check out our latest analysis for Vmoto
We use what is known as a 2-step model, which simply means that we have two different growth rates for the company's cash flows. Generally, the first stage is higher growth and the second stage is lower growth phase. In the first phase, we need to estimate the cash flows for the business over the next ten years. As we have no analysts' estimates of free cash flow, we extrapolated the previous free cash flow (FCF) from the company's last reported value. We assume that companies with shrinking free cash flow will slow their rate of contraction and that companies with increasing free cash flow will slow their growth rate over this period. We do this to reflect that growth tends to slow down more in the early years than in later years.
A DCF is all about the idea that a dollar in the future is worth less than a dollar today. Hence, we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
Leverage FCF (A $, million)
AU $ 3.99 million
AU $ 5.58 million
AU $ 7.18 million
AU $ 8.68 million
AU $ 10.00m
AU $ 11.1 million
AU $ 12.1 million
AU $ 12.9 million
AU $ 13.6 million
AU $ 14.2 million
Source for growth rate estimation
Est @ 56.21%
Est @ 40.02%
Est @ 28.7%
Est @ 20.76%
Est @ 15.21%
Est @ 11.33%
Est @ 8.61%
Est @ 6.7%
Est @ 5.37%
Est @ 4.44%
Present Value (A $, Million) Discount @ 10.0%
AU $ 3.6
AU $ 4.6
AU $ 5.4
AU $ 5.9
AU $ 6.2
AU $ 6.3
AU $ 6.2
AU $ 6.0
AU $ 5.8
AU $ 5.5
("Est" = FCF growth rate, estimated by Simply Wall St)
Present Value of 10 Year Cash Flow (PVCF) = AU $ 55 million
We now need to calculate the final value that takes into account all future cash flows after this ten year period. A very conservative growth rate is used that cannot exceed that of any country's GDP growth for a number of reasons. In this case, we used the 5-year average 10-year government bond yield (2.3%) to estimate future growth. Similar to the 10-year growth period, we discount future cash flows to today's value using a cost of equity rate of 10.0%.
End value (TV) = FCF2030 × (1 + g) ÷ (r - g) = AU $ 14 million × (1 + 2.3%) ÷ (10.0% - 2.3%) = AU $ 188 million $
Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = AU $ 188 million ÷ (1 + 10.0%) 10 = AU $ 73 million
The total or equity value is then the sum of the present value of the future cash flows, which in this case is AU $ 128 million. The final step is to divide the equity value by the number of shares issued. Based on the current share price of AU $ 0.5, the company appears at fair value at the time of writing. Ratings, however, are inaccurate instruments, more like a telescope - move a few degrees and land in a different galaxy. Keep that in mind.
The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. Part of the investment is making your own assessment of a company's future performance. So try the calculation yourself and check your own assumptions. The DCF also does not take into account the possible cyclical nature of an industry or the future capital requirements of a company, so it does not give a complete picture of a company's potential performance. Since we consider Vmoto 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) responsible for debt. In this calculation we used 10.0% which is based on a leverage beta of 1.283. Beta is a measure of the volatility of a stock compared to the overall market. We get our beta from the industry-standard average beta of globally comparable companies with a set limit between 0.8 and 2.0, which is a reasonable range for a stable business.
While the DCF calculation is important, it ideally isn't the only analysis you consider for a company. A foolproof assessment is not possible with a DCF model. Rather, it should be seen as a guide to "what assumptions must be made for this stock to be undervalued or overvalued?" If a company is growing at a different rate, or if the cost of equity or the risk-free rate changes dramatically, performance can look very different. For Vmoto, there are three main factors to investigate:
Risks: Every company has them, and we've discovered two warning signs for Vmoto that you should be aware of.
Other Solid Businesses: Low debt, high returns on equity, and good past performance are fundamental to a strong business. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you might not have considered!
Other Green Companies: Are you concerned about the environment and believe that consumers will buy more and more environmentally friendly products? Search our interactive list of companies contemplating a greener future to discover some stocks you might not have thought of!
PS. Simply Wall St updates its DCF calculation daily for every Australian share. So if you want to find out the intrinsic value of any other stock, just search here.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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