Estimating The Intrinsic Value Of Winton Land Limited (NZSE:WIN)

Key Insights

• Winton Land's estimated fair value is NZ$2.43 based on 2 Stage Free Cash Flow to Equity

• Winton Land's NZ$2.18 share price indicates it is trading at similar levels as its fair value estimate

In this article we are going to estimate the intrinsic value of Winton Land Limited (NZSE:WIN) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Winton Land

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (NZ$, Millions)	NZ$29.5m	NZ$32.9m	NZ$35.7m	NZ$38.2m	NZ$40.3m	NZ$42.2m	NZ$43.9m	NZ$45.4m	NZ$46.9m	NZ$48.4m
Growth Rate Estimate Source	Est @ 15.07%	Est @ 11.32%	Est @ 8.69%	Est @ 6.85%	Est @ 5.56%	Est @ 4.65%	Est @ 4.02%	Est @ 3.58%	Est @ 3.27%	Est @ 3.06%
Present Value (NZ$, Millions) Discounted @ 7.6%	NZ$27.4	NZ$28.4	NZ$28.7	NZ$28.5	NZ$27.9	NZ$27.2	NZ$26.3	NZ$25.3	NZ$24.3	NZ$23.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = NZ$267m

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 7.6%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = NZ$48m× (1 + 2.6%) ÷ (7.6%– 2.6%) = NZ$982m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= NZ$982m÷ ( 1 + 7.6%)¹⁰= NZ$472m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is NZ$739m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of NZ$2.2, the company appears about fair value at a 10% discount to where the stock price trades currently. 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

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Winton Land 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 7.6%, which is based on a levered beta of 1.098. 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.

SWOT Analysis for Winton Land

Strength

• Debt is not viewed as a risk.

Weakness

• Earnings declined over the past year.

• Dividend is low compared to the top 25% of dividend payers in the Real Estate market.

• Shareholders have been diluted in the past year.

Opportunity

• Annual revenue is forecast to grow faster than the New Zealander market.

• Current share price is below our estimate of fair value.

Threat

• No apparent threats visible for WIN.

Looking Ahead:

Although the valuation of a company is important, it 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?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Winton Land, we've put together three further items you should further examine:

1. Risks: We feel that you should assess the 2 warning signs for Winton Land we've flagged before making an investment in the company.

2. Future Earnings: How does WIN'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.

3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NZSE every day. If you want to find the calculation for other stocks just search here.

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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.