Is There An Opportunity With Hastings Technology Metals Limited’s (ASX: HAS) 45% Undervaluation?

In this article we are going to estimate the intrinsic value of Hastings Technology Metals Limited (ASX: HAS) by estimating the company’s future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Hastings Technology Metals

The calculation

We’re using the 2-stage growth model, which simply means we take into account two stages of the company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) estimate

2022202320242025202620272028202920302031
Delivered FCF (A $, Millions) -AU $ 28.0m-AU $ 304.0m-AU $ 368.0mAU $ 78.0mAU $ 244.0mAU $ 388.9mAU $ 552.7mAU $ 718.6mAU $ 873.5mAU $ 1.01b
Growth Rate Estimate SourceAnalyst x1Analyst x1Analyst x1Analyst x1Analyst x1Est @ 59.39%Est @ 42.11%Est @ 30.02%Est @ 21.55%Est @ 15.63%
Present Value (A $, Millions) Discounted @ 6.2% -AU $ 26.4-AU $ 270-AU $ 308AU $ 61.4AU $ 181AU $ 272AU $ 364AU $ 445AU $ 510AU $ 555

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU $ 1.8b

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 (1.8%) 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 6.2%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = AU $ 1.0b × (1 + 1.8%) ÷ (6.2% – 1.8%) = AU $ 24b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU $ 24b ÷ (1 + 6.2%)10= AU $ 13b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU $ 15b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU $ 4.0, the company appears quite undervalued at a 45% discount to where the stock price trades currently. 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.

ASX: HAS Discounted Cash Flow June 22nd 2022

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you do not agree with these result, have a go at the calculation yourself and play with the 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 Hastings Technology Metals 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 6.2%, which is based on a delivered beta of 1,029. 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.

Moving On:

Although the valuation of a company is important, it should not be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Hastings Technology Metals, we’ve compiled three essential items you should assess:

  1. Risks: Case in point, we’ve spotted 3 warning signs for Hastings Technology Metals you should be aware of, and 1 of them can not be ignored.
  2. Future Earnings: How does HAS’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the coming 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. The Simply Wall St app conducts 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.

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 into account 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.

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