Nine Entertainment Co. Holdings Limited (ASX:NEC) 42% Undervalued Is there a chance?

key insights

Nine Entertainment Holdings Limited (ASX Code: NEC) from its intrinsic value? We’ll use the most recent financial data to determine whether a stock is reasonably priced by estimating the company’s future cash flows and discounting them to present value. This will be done using a discounted cash flow (DCF) model. It’s not really that much, although it may seem complicated.

But remember, there are many ways to estimate the value of a company, and DCF is just one of them.If you still have questions about such valuations, please review the Simply Wall St Analysis Model.

View our latest analysis for Nine Entertainment Holdings

Calculate step by step

We are using a two-stage growth model, which simply means that we consider two stages of company growth. A company may have a high growth rate in the initial stage, while the second stage usually assumes a steady growth rate. In the first stage, we need to estimate the cash flow of the business for the next ten years. Where possible, we use analysts’ estimates, but when these are not available, we extrapolate prior free cash flow (FCF) based on the last estimate or reported value. We assume that companies with shrinking free cash flow will contract at a slower rate, while companies with growing free cash flow will experience slower growth rates over the period. We do this to reflect that growth tends to slow more in earlier years than in later years.

DCF is the idea that a dollar in the future is less valuable than a dollar today, so the sum of these future cash flows is then discounted to today’s value:

10-Year Free Cash Flow (FCF) Estimation

(“Est” = Simply Wall St estimated FCF growth rate)
10-Year Present Value of Cash Flows (PVCF) = AUD 2.5

We now need to calculate the terminal value, which represents all future cash flows after this decade. The Gordon Growth Formula is used to calculate the future annual growth rate equal to the terminal value of the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to today’s value at a cost of equity of 7.4%.

Future Value (TV)= free cash flow₂₀₃₂ × (1 + g) ÷ (r – g) = AU$369m× (1 + 1.9%) ÷ (7.4%– 1.9%) = AU$6.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= AU$6.8b÷ ( 1 + 7.4%)¹⁰= 3.3 AUD

The total value is the sum of the cash flows over the next ten years plus the discounted future value to give the total equity value, in this case AU$5.8b. To get intrinsic value per share, we divide it by the total number of shares outstanding. Relative to the current share price of A$2.1, the company appears to be quite good value, representing a 42% discount to the current share price. Assumptions in any calculation can have a big impact on valuations, so it’s best to treat them as rough estimates rather than down to the last penny.

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We would like to point out that the most important inputs to discounting cash flows are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculations yourself and check your own assumptions. The DCF also does not take into account the likely cyclicality of the industry or the future capital requirements of the company, so it does not give the full picture of the company’s potential performance. Given that we consider Nine Entertainment Holdings as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) accounting for debt. In this calculation, we used 7.4%, which is based on a leveraged beta of 0.924. Beta is a measure of a stock’s volatility relative to the overall market. Our beta is derived from the industry average beta of globally comparable companies, limited between 0.8 and 2.0, which is a reasonable range for a stable business.

Nine Entertainment Holdings SWOT Analysis

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Valuation is only one side of the coin in terms of building an investment thesis, and it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead, the best use of the DCF model is to test certain assumptions and theories to see if they cause companies to be undervalued or overvalued. For example, if terminal value growth rates were adjusted slightly, it could change the overall results significantly. What is the reason why the stock price is lower than the intrinsic value? For Nine Entertainment Holdings, we have summarized three relevant factors that you should pay attention to:

1. risk: For example, we found 1 warning sign for Nine Entertainment Holdings You should know this before investing here.
2. future earnings: How does NEC’s growth rate compare to its peers and the broader market?Gain insight into analyst consensus numbers for the next few years by interacting with us Free Analyst Growth Expectations Chart.
3. Other High Quality Alternatives: Do you like a good all-rounder?explore Our Interactive List of Premium Stocks Find out what else you might be missing!

postscript. Simply Wall St updates its DCF calculations for every Australian stock on a daily basis, so if you want to find the intrinsic value of any other stock, just search here.

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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.