Investors Are Undervaluing Gama Aviation Plc (LON:GMAA) By 27%
How far off is Gama Aviation Plc (AIM:GMAA) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. 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 April 2018 so be sure check the latest calculation for Gama Aviation here.
Is GMAA fairly valued?
I will be using the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I took the analyst consensus estimates of GMAA’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.3%. 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 US$44.24M. Want to understand how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how GMAA’s top and bottom lines are expected to move in the future, which should give you an idea of GMAA’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. After discounting the terminal value back five years, the present value becomes US$206.27M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$250.51M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £2.82, which, compared to the current share price of £2.05, we find that Gama Aviation is about right, perhaps slightly undervalued at a 27.40% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and 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 GMAA, I’ve compiled three essential factors you should further research:
Financial Health: Does GMAA 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 GMAA’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 GMAA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.
