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Is There An Opportunity With Genesis Energy Limited’s (NZE:GNE) 31% Undervaluation?

Bruce Howe

I am going to run you through how I calculated the intrinsic value of Genesis Energy Limited (NZSE:GNE) using the discounted cash flow (DCF) method. 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 March 2018 so be sure check the latest calculation for Genesis Energy here.

What’s the value?

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 begin, I use the analyst consensus estimates of GNE’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.55%. This resulted in a present value of 5-year cash flow of NZ$936.76M. Keen to know how I calculated this value? Take a look at our detailed analysis here.

NZSE:GNE Future Profit Mar 14th 18

The graph above shows how GNE’s earnings are expected to move going forward, which should give you some color on GNE’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. 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 NZ$2.52B.

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 NZ$3.46B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of NZ$3.46, which, compared to the current share price of NZ$2.38, we find that Genesis Energy is quite undervalued at a 31.16% discount to what it is available for right now.

Next Steps:

Whilst important, DCF calculation 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 GNE, I’ve put together three fundamental aspects you should look at:

  1. Financial Health: Does GNE 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 GNE’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 GNE? 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 NZSE 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.