Yahoo Finance Contact Energy Limited (NZE:CEN) Is Trading At A 49% Discount
Does the share price for Contact Energy Limited (NZSE:CEN) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after June 2018 then I highly recommend you check out the latest calculation for Contact Energy here.
Crunching the numbers
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I took the analyst consensus forecast of CEN’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.01%. This resulted in a present value of 5-year cash flow of NZ$1.52B. Want to know how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how CEN’s top and bottom lines are expected to move in the future, which should give you an idea of CEN’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is NZ$6.85B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is NZ$8.37B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of NZ$11.68, which, compared to the current share price of NZ$5.92, we see that Contact Energy is quite undervalued at a 49.31% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For CEN, there are three essential aspects you should further examine:
Financial Health: Does CEN have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does CEN’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CEN? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every NZ stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
