Yahoo Finance An Intrinsic Calculation For Asanko Gold Inc (TSE:AKG) Shows It’s 37.15% Undervalued
I am going to run you through how I calculated the intrinsic value of Asanko Gold Inc (TSE:AKG) by taking the expected future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.
See our latest analysis for Asanko Gold
The method
I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF ($, Millions) | $2.33 | $36.00 | $40.00 | $41.00 | $47.56 |
Source | Analyst x3 | Analyst x2 | Analyst x1 | Analyst x1 | Est @ 16%, capped from 44.53% |
Present Value Discounted @ 15.56% | $2.02 | $26.96 | $25.92 | $22.99 | $23.08 |
Present Value of 5-year Cash Flow (PVCF)= US$101m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.3%. We discount this to today’s value at a cost of equity of 15.6%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$48m × (1 + 2.3%) ÷ (15.6% – 2.3%) = US$368m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$368m ÷ ( 1 + 15.6%)5 = US$179m
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$280m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value in the company’s reported currency of $1.24. However, AKG’s primary listing is in Canada, and 1 share of AKG in USD represents 1.31 ( USD/ CAD) share of TSX:AKG, so the intrinsic value per share in CAD is CA$1.62. Compared to the current share price of CA$1.02, the stock is quite undervalued at a 37% discount to what it is available for right now.
The 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 don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Asanko Gold as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 15.6%, which is based on a levered beta of 1.726. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For AKG, I’ve put together three fundamental factors you should further research:
Financial Health: Does AKG have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does AKG’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of AKG? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
