Yahoo Finance Is Praemium Limited (ASX:PPS) Worth $0.695 Based On Intrinsic Value?
Does the share price for Praemium Limited (ASX:PPS) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value 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. If you are reading this after May 2018 then I highly recommend you check out the latest calculation for Praemium here.
What’s the value?
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I pulled together the analyst consensus forecast of PPS’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 AU$37.99M. Want to know how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how PPS’s top and bottom lines are expected to move going forward, which should give you an idea of PPS’s outlook. Secondly, I determine 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 stable 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 AU$176.56M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AU$214.55M. 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$0.54, which, compared to the current share price of A$0.695, we find that Praemium is fair value, maybe slightly overvalued at the time of writing.
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 PPS, I’ve compiled three essential factors you should further examine:
Financial Health: Does PPS 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.
Future Earnings: How does PPS’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of PPS? 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 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.
