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We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (3.7%) to estimate future growth. In the same way as with the 10-year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = RM504m× (1 + 3.7%) ÷ (11%– 3.7%) = RM7.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= RM7.6b÷ ( 1 + 11%)¹⁰= RM2.8b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM5.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of RM1.7, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at AirAsia X Berhad as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 11%, which is based on a levered beta of 1.150. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

See our latest analysis for AirAsia X Berhad

Strength

Weakness

Opportunity

Threat

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It’s not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. For AirAsia X Berhad, we’ve put together three relevant elements you should look at:

1. Risks: For example, we’ve discovered 2 warning signs for AirAsia X Berhad (1 is significant!) that you should be aware of before investing here.

2. Future Earnings: How does AAX’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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Malaysian stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Compass Minerals International.

For companies where sales are a more stable reference point than earnings, the P/S ratio can be a useful way to think about what you are paying for each dollar of revenue.

What counts as a reasonable P/S multiple usually reflects how the market views a company’s growth potential and risk profile. Higher expected growth and lower perceived risk tend to support higher multiples, while slower expected growth or higher risk often line up with lower ones.

Compass Minerals International currently trades on a P/S of 0.78x. That sits well below the Metals and Mining industry average P/S of 3.16x and also below the peer average of 9.84x that Simply Wall St tracks for this group. On headline comparisons alone, the stock screens as cheaper than both its sector and similar companies on a sales basis.

Simply Wall St’s Fair Ratio takes this a step further. It estimates what a more tailored P/S might look like, based on factors such as earnings growth, industry, profit margins, market cap and company specific risks. Because it adjusts for these elements, it can be more informative than raw peer or industry comparisons.

For Compass Minerals International, the Fair Ratio is 0.61x versus the current 0.78x. That gap points to the shares looking overvalued relative to this customised benchmark.

Result: OVERVALUED

P/S ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1442 companies where insiders are betting big on explosive growth.

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which are simply your story about Compass Minerals International. A Narrative links your assumptions for future revenue, earnings, margins and fair value to a clear financial forecast that you can compare with today’s share price. All of this is available within an easy tool on Simply Wall St’s Community page that updates automatically when new earnings or news arrive. This allows you to see in real time whether your Fair Value suggests the shares look more attractive or less attractive than the current US$23.29 price. You can also see how other investors frame the same stock. For example, some may build a Narrative around the US$20.75 fair value and modest revenue growth and margin assumptions, while others use more cautious or more optimistic inputs, giving you a range of perspectives to weigh against your own view.

Do you think there’s more to the story for Compass Minerals International? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include CMP.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com