Is There An Opportunity With GBST Holdings Limited’s (ASX:GBT) 43.05% Undervaluation?
In this article I am going to calculate the intrinsic value of GBST Holdings Limited (ASX:GBT) using the discounted cash flows (DCF) model. 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 January 2018 then I highly recommend you check out the latest calculation for GBST Holdings here.
Is GBT fairly valued?
We are going to use a two-stage DCF 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. To start off, I took the analyst consensus estimates of GBT’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.55%. 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 A$48.0M. Want to know how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how GBT’s earnings are expected to move in the future, which should give you an idea of GBT’s outlook. Secondly, I 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 steady 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 A$234.7M.
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 A$282.6M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of A$4.16, which, compared to the current share price of A$2.37, we find that GBST Holdings is quite good value at a 43.05% 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 GBT, I’ve put together three pertinent aspects you should look at:
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 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.
