Using the dividend discount model, the fair value estimate for Nickel Industries is AU$0.96.
The current share price of AUD$0.87 suggests that Nickel Industries may be trading near fair value.
NIC’s analyst price target of $1.28 exceeds our fair value estimate by 34%
Today we briefly discuss the valuation methodology used to estimate the attractiveness of Nickel Industries Limited (ASX:NIC) as an investment opportunity by discounting its expected future cash flows to their present value. One way to achieve this is to employ a discounted cash flow (DCF) model. Don’t be put off by the jargon. The math behind it is actually pretty simple.
It’s worth pointing out that the DCF isn’t perfect for every situation, as companies are evaluated in many different ways. If you still have questions about this type of evaluation, take a look at the Simply Wall St analytical model.
Get the latest analysis on the nickel industry.
Nickel Industries is a metals and mining company, so its value needs to be calculated a little differently than other stocks. Free cash flow is difficult to estimate and often not reported by analysts, so he uses dividends per share (DPS) in this approach. Unless the company pays out a large portion of its FCF in dividends, this method usually undervalues the stock. We use the Gordon Growth Model, which assumes that dividends will grow at a sustainable rate forever. The dividend is expected to grow at an annual growth rate similar to the five-year average 2.0% of the 10-year Treasury yield. Then discount this figure to its present value at the cost of capital of 9.6%. Compared to the current share price of AUD$0.9, the company appears to be near fair value at a 9.0% discount to the current share price. But keep in mind that this is just a rough estimate, and like any complex formula, there is garbage in and garbage out.
Value per share = expected dividend per share / (discount rate – perpetual growth rate)
= USD 0.05 / (9.6% – 2.0%)
= 1.0 Australian dollar
It should be pointed out that the most important input to discounted cash flows is the discount rate and, of course, the actual cash flows. You do not have to consent to these inputs. I suggest you redo the calculations yourself and give it a try. In addition, the DCF does not take into account potential industry cyclicality or the company’s future capital requirements, so it does not give a complete picture of a company’s potential performance. Given that we are considering Nickel Industries as a potential shareholder, the cost of equity is used as the discount rate rather than the debt-adjusted cost of capital (or weighted average cost of capital, WACC). For this calculation, we used 9.6% based on a leverage beta of 1.288. Beta is a measure of a stock’s volatility relative to the market as a whole. Beta values are taken from industry average beta values of globally comparable companies and are subject to limits of 0.8 to 2.0, a reasonable range for stable businesses.
SWOT Analysis of the Nickel Industry
to the next:
A company’s valuation is important, but ideally it’s not the only analysis item that scrutinizes the company. The DCF model is not a perfect stock valuation tool. Rather, the DCF model’s best use is to test certain assumptions or theories to see if a company is undervalued or overvalued. For example, a small adjustment to the terminal value growth rate can dramatically change the overall result. For the nickel industry, there are three items that should be further investigated.
risk: For example, I’ve verified that: Three warning signs for the nickel industry what you should know.
management: Are insiders using market sentiment on NIC’s future prospects to buy more shares? Discover our executive team and board analysis with insights on CEO compensation and governance factors.
Other quality alternatives: Do you like good all-rounders? Explore our interactive list of quality stocks to find out what else you’re missing.
PS. Simply Wall St updates the DCF calculations for all Australian stocks daily, so if you want to know the intrinsic value of other stocks, search here.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst projections, and articles are not intended as financial advice. This is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to provide long-term focused analysis based on underlying data. Please note that our analysis may not take into account the latest announcements or qualitative material from price-sensitive companies. Simply Wall St does not have any positions in any of the securities mentioned.
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