Calculating The Intrinsic Value Of AGL Energy Limited (ASX:AGL)

Simply Wall St.10-23

Key Insights Using the 2 Stage Free Cash Flow to Equity, AGL Energy fair value estimate is AU$11.45 AGL Energy's AU$11.59 share price indicates it is trading at similar levels as its fair value ...

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AGL Energy's AU$11.59 share price indicates it is trading at similar levels as its fair value estimate. The AU$12.15 analyst price target for AGL is 6.1% more than our estimate of fair value. Today we will run through one way of estimating the intrinsic value of AGL Energy Limited  by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow  model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4196":"保健护理服务","FCF":"第一联邦金融","BK4211":"区域性银行","BK7136":"复合型公用事业","TV":"墨西哥电视","DCF":"Dreyfus Alcentra Global Credit Income 2024 Target Term Fund, Inc","BK4539":"次新股","AGL":"agilon health, inc.","BK4100":"有线和卫星","AGL.AU":"AGL ENERGY LTD"},"translate_title":"计算AGL Energy Limited(ASX：AGL)的内在价值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AGL":1,"AGL.AU":1,"DCF":1,"FCF":1,"TV":1},"content_text":"Key Insights\n\n Using the 2 Stage Free Cash Flow to Equity, AGL Energy fair value estimate is AU$11.45 \n AGL Energy's AU$11.59 share price indicates it is trading at similar levels as its fair value estimate \n  The AU$12.15 analyst price target for AGL is 6.1% more than our estimate of fair value \n\n Today we will run through one way of estimating the intrinsic value of AGL Energy Limited (ASX:AGL) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow. \n We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. \n See our latest analysis for AGL Energy \n Crunching The Numbers \n We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. \n Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: \n 10-year free cash flow (FCF) forecast \n\n\n\n\n2025\n2026\n2027\n2028\n2029\n2030\n2031\n2032\n2033\n2034\n\n\n Levered FCF (A$, Millions) \nAU$340.7m\nAU$524.0m\nAU$570.8m\nAU$428.0m\nAU$356.1m\nAU$316.9m\nAU$294.7m\nAU$282.4m\nAU$276.2m\nAU$273.9m\n\n\nGrowth Rate Estimate Source\nAnalyst x3\nAnalyst x2\nAnalyst x2\nEst @ -25.02%\nEst @ -16.79%\nEst @ -11.03%\nEst @ -7.00%\nEst @ -4.17%\nEst @ -2.20%\nEst @ -0.82%\n\n\n Present Value (A$, Millions) Discounted @ 5.7% \nAU$322\nAU$469\nAU$483\nAU$343\nAU$270\nAU$227\nAU$200\nAU$181\nAU$168\nAU$157\n\n\n\n(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$2.8b\n After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 (2.4%) 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 5.7%. \nTerminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$274m× (1 + 2.4%) ÷ (5.7%– 2.4%) = AU$8.5b\nPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$8.5b÷ ( 1 + 5.7%)10= AU$4.9b\n 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$7.7b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$11.6, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. \n\n\n\n  ASX:AGL Discounted Cash Flow October 22nd 2024\n \n\n Important Assumptions \n We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't 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 AGL Energy 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 5.7%, which is based on a levered beta of 0.800. 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. \nSWOT Analysis for AGL Energy\n\n\nStrength\n\nDebt is not viewed as a risk.\n\n\nDividends are covered by earnings and cash flows.\n\n\nDividend is in the top 25% of dividend payers in the market.\n\n\nDividend information for AGL.\n\n\n\nWeakness\n\n No major weaknesses identified for AGL.\n\n\n\nOpportunity\n\nAnnual earnings are forecast to grow for the next 3 years.\n\n\nGood value based on P/E ratio compared to estimated Fair P/E ratio.\n\n\n\nThreat\n\n Annual earnings are forecast to grow slower than the Australian market.\n\n\nWhat else are analysts forecasting for AGL?\n\n\n\n Next Steps: \n Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For AGL Energy, there are three further items you should assess: \n\n Risks: For example, we've discovered 1 warning sign for AGL Energy that you should be aware of before investing here. \nFuture Earnings: How does AGL'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.\n Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! \n\n 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.\nHave 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. 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