Calculation of the intrinsic value of Betmakers Technology Group Ltd (ASX: BET)
Today we are going to review a valuation method used to estimate the attractiveness of Betmakers Technology Group Ltd (ASX: BET) as an investment opportunity by projecting its future cash flows and then discounting them. at the current value. One way to do this is to use the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
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Crunch the numbers
We’re going to use a two-stage DCF model, which, as the name suggests, takes into account two growth stages. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. In the first step, we have to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated 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 down more in the early years than in subsequent 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 those future cash flows to their estimated value in today’s dollars. hui:
10-year free cash flow (FCF) forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (A $, Millions) | – A $ 4.70 million | AU $ 5.60 million | AU $ 14.4 million | 22.6 million Australian dollars | AU $ 31.8 million | AU $ 41.0 million | AU $ 49.6 million | A $ 57.1 million | 63.5 million Australian dollars | 68.8 million Australian dollars |
Source of growth rate estimate | Analyst x1 | Analyst x1 | Analyst x1 | Est @ 57.13% | Est @ 40.56% | Est @ 28.97% | East @ 20.86% | Is 15.18% | East @ 11.2% | Est @ 8.42% |
Present value (A $, Millions) discounted at 7.3% | -A $ 4.4 | AU $ 4.9 | AU $ 11.6 | A $ 17.0 | A $ 22.3 | AU $ 26.8 | A $ 30.2 | A $ 32.4 | A $ 33.6 | A $ 33.9 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 208 million Australian dollars
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to their present value at a cost of equity of 7.3%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = AU $ 69 million × (1 + 1.9%) ÷ (7.3% to 1.9%) = AU $ 1.3 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= A $ 1.3 billion ÷ (1 + 7.3%)^{ten}= AU $ 637 million
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is AU $ 845 million. 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 $ 1.1, the company appears to be around fair value at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
Important assumptions
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the assumptions. 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 full picture of a company’s potential performance. Since we view Betmakers Technology Group 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 into account debt. In this calculation, we used 7.3%, which is based on a leveraged beta of 1.149. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Looking forward:
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rock-solid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Betmakers Technology Group, there are three important factors you should look into:
- Risks: To do this, you need to know the 2 warning signs we spotted with Betmakers Technology Group.
- Future benefits: How does BET’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: 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 trading fundamentals to see if there are other companies you might not have considered!
PS. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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