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Estimating The Fair Value Of AoFrio Limited (NZSE:AOF)

Key Insights

  • The projected fair value for AoFrio is NZ$0.043 based on 2 Stage Free Cash Flow to Equity

  • With NZ$0.051 share price, AoFrio appears to be trading close to its estimated fair value

  • AoFrio's peers seem to be trading at a higher premium to fair value based onthe industry average of -463%

In this article we are going to estimate the intrinsic value of AoFrio Limited (NZSE:AOF) by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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See our latest analysis for AoFrio

Step By Step Through The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable 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) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (NZ$, Millions)

NZ$1.20m

NZ$1.21m

NZ$1.23m

NZ$1.24m

NZ$1.27m

NZ$1.29m

NZ$1.32m

NZ$1.35m

NZ$1.39m

NZ$1.42m

Growth Rate Estimate Source

Est @ -0.24%

Est @ 0.60%

Est @ 1.18%

Est @ 1.59%

Est @ 1.88%

Est @ 2.08%

Est @ 2.22%

Est @ 2.32%

Est @ 2.39%

Est @ 2.44%

Present Value (NZ$, Millions) Discounted @ 8.7%

NZ$1.1

NZ$1.0

NZ$1.0

NZ$0.9

NZ$0.8

NZ$0.8

NZ$0.7

NZ$0.7

NZ$0.7

NZ$0.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NZ$8.3m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.6%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.7%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = NZ$1.4m× (1 + 2.6%) ÷ (8.7%– 2.6%) = NZ$24m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$24m÷ ( 1 + 8.7%)10= NZ$10m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is NZ$19m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of NZ$0.05, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at AoFrio 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 accounts for debt. In this calculation we've used 8.7%, which is based on a levered beta of 1.342. Beta is a measure of a stock's volatility, compared 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.

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For AoFrio, we've put together three fundamental items you should further examine:

  1. Risks: For instance, we've identified 2 warning signs for AoFrio (1 shouldn't be ignored) you should be aware of.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for AOF's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other High Quality Alternatives: Do you like a good all-rounder? 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 updates its DCF calculation for every New Zealander stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.