Polymetal International Plc (LSE:POLY) Is Trading At A 32.13% Discount To Its Intrinsic Value
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Polymetal International Plc (LSE:POLY) as an investment opportunity. 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 November 2017 so be sure check the latest calculation for Polymetal International here.
Is POLY fairly valued?
I use what is known as the 2-stage 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 use the analyst consensus forecast of POLY’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 10.48%. This resulted in a present value of 5-year cash flow of £1,868M. Keen to understand how I calculated this value? Read our detailed analysis here.
In the visual above, we see how how POLY’s earnings are expected to move going forward, which should give you an idea of POLY’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate 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. The present value of the terminal value after discounting it back five years is £5,486M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £7,355M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £12.88, which, compared to the current share price of £8.745, we see that Polymetal International is quite undervalued at a 32.13% 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 POLY, I’ve compiled three fundamental aspects you should further research:
PS. Simply Wall St does a DCF calculation for every GB 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.
