An Intrinsic Value Calculation For Central Asia Metals Plc (LON:CAML) Shows It’s 35.32% Undervalued
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Central Asia Metals Plc (AIM:CAML) as an investment opportunity. 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 December 2017 then I highly recommend you check out the latest calculation for Centralia Metals here.
Is CAML fairly valued?
We are going to use a two-stage DCF model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I pulled together the analyst consensus estimates of CAML’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.96%. This resulted in a present value of 5-year cash flow of $291.1M. Keen to understand how I calculated this value? Read our detailed analysis here.
In the visual above, we see how how CAML’s top and bottom lines are expected to move in the future, which should give you an idea of CAML’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable 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 $714.3M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,005.4M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £4.41, which, compared to the current share price of £2.85, we see that Centralia Metals is quite undervalued at a 35.32% 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 CAML, there are three essential aspects you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the AIM every 6 hours. If you want to find the calculation for other stocks 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.