PointsBet Holdings Limited (ASX:PBH) shares could be 25% below their intrinsic value estimate


How far is PointsBet Holdings Limited (ASX: PBH) of its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by estimating the company’s future cash flows and discounting them to their present value. This will be done using the discounted cash flow (DCF) model. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.

We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St Analysis Template.

Check out our latest analysis for PointsBet Holdings

The calculation

We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:

Estimated free cash flow (FCF) over 10 years

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Leveraged FCF (A$, Millions)

-251.7 million Australian dollars

-275.4 million Australian dollars

-A$191.1 million

-A$19.0 million

A$27.0 million

A$43.1 million

A$61.2 million

A$79.6 million

A$96.8 million

A$112.0 million

Growth rate estimate Source

Analyst x6

Analyst x5

Analyst x3

Analyst x2

Analyst x1

Is at 59.5%

East @ 42.19%

Is at 30.07%

East @ 21.59%

Is at 15.65%

Present value (A$, millions) discounted at 6.2%

-$237

-AU$244

-$160

-AU$14.9

AU$20.0

AU$30.0

AU$40.2

AU$49.3

AU$56.4

AU$61.4

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = -398 million Australian dollars

We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.8%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 6.2%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = AU$112 million × (1 + 1.8%) ÷ (6.2%–1.8%) = AU$2.6 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= AU$2.6 billion÷ (1 + 6.2%)ten= AU$1.4 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is A$1.0 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of AU$2.9, the company looks slightly undervalued at a 25% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.

dcf

Important assumptions

Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. You don’t have to agree with these entries, I recommend you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider PointsBet Holdings 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 takes debt into account. In this calculation, we used 6.2%, which is based on a leveraged beta of 1.035. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Let’s move on :

While important, calculating DCF shouldn’t be the only metric to consider when researching a business. The DCF model is not a perfect stock valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Why is the stock price below intrinsic value? For PointsBet Holdings, we’ve compiled three relevant things you should explore:

  1. Risks: Every business has them, and we’ve spotted 3 warning signs for PointsBet Holdings you should know.

  2. Future earnings: How does PBH’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.

  3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what else you might be missing!

PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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