Yahoo Finance Restaurant Brands New Zealand Limited (NZE:RBD) Is Trading At A 24% Discount
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Restaurant Brands New Zealand Limited (NZSE:RBD) as an investment opportunity. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in June 2018 so be sure check the latest calculation for Restaurant Brands New Zealand here.
What’s the value?
I’ve used the 2-stage growth 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. Firstly, I took the analyst consensus estimates of RBD’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.01%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of NZ$41.84M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how RBD’s earnings are expected to move going forward, which should give you an idea of RBD’s outlook. Next, 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. Discounting the terminal value back five years gives us a present value of NZ$1.22B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is NZ$1.26B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of NZ$10.18, which, compared to the current share price of NZ$7.78, we see that Restaurant Brands New Zealand is about right, perhaps slightly undervalued at a 23.59% 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 RBD, there are three relevant aspects you should further examine:
Financial Health: Does RBD 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 RBD’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 RBD? 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.
