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A Look At The Intrinsic Value Of Sydney Airport Limited (ASX:SYD)

Neil Montgomery

Does the January share price for Sydney Airport Limited (ASX:SYD) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Sydney Airport by following the link below.

See our latest analysis for Sydney Airport

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The calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2019 2020 2021 2022 2023
Levered FCF (A$, Millions) A$754.61 A$840.17 A$900.31 A$964.76 A$1.03k
Source Analyst x2 Analyst x2 Est @ 7.16% Est @ 7.16% Est @ 7.16%
Present Value Discounted @ 8.55% A$695.14 A$712.97 A$703.80 A$694.74 A$685.80

Present Value of 5-year Cash Flow (PVCF)= AU$3.5b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.6%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = AU$1.0b × (1 + 2.8%) ÷ (8.6% – 2.8%) = AU$18b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$18b ÷ ( 1 + 8.6%)5 = AU$12b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$16b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of A$6.95. Relative to the current share price of A$6.61, the stock is about right, perhaps slightly undervalued at a 5.0% discount to what it is available for right now.

ASX:SYD Intrinsic Value Export January 14th 19

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Sydney Airport as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.6%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For SYD, I’ve put together three key factors you should look at:

  1. Financial Health: Does SYD 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.
  2. Future Earnings: How does SYD’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of SYD? 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 AU stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.