key insights
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Scott Technology's estimated fair value is NZ$2.13 based on a dividend discount model.
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Scott Technology's share price of NZ$2.40 suggests the company is trading at a level similar to its fair value estimate.
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Scott Technology's peers are currently trading at an average discount of 25%
Does Scott Technology Limited (NZSE:SCT)'s May share price reflect its real value? Today we will explore the stock's intrinsic value by forecasting its future cash flows and discounting them to today's value. Estimate the value. Here we use a discounted cash flow (DCF) model. Although such a model may seem beyond the comprehension of a layman, it is very easy to follow.
Keep in mind that there are many different ways to value a company, and as with DCFs, each method has advantages and disadvantages in certain scenarios. For those who are keen to learn stock analysis, the Simply Wall St analysis model here may be of interest.
Check out our latest analysis for Scott Technology.
model
Scott Technology operates in the machinery sector, so we need to calculate its intrinsic value a little differently. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and is often not reported by analysts. Unless the company pays out a significant portion of its FCF as dividends, this method typically results in the stock being undervalued. The “Gordon Growth Model” is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. For various reasons, a very conservative growth rate is used that cannot exceed the company's gross domestic product (GDP). In this case, we used the five-year average of the 10-year government bond yield (2.7%). The expected dividend per share is discounted to its current value at a cost of capital of 8.3%. Compared to the current share price of NZ$2.4, the company's fair value is considered to be approximately fair value at the time of writing. However, evaluation is an imprecise measure and is more like a telescope. After moving a few degrees, you will eventually reach another galaxy. Please keep this in mind.
Value per share = Expected dividend per share / (discount rate – perpetual growth rate)
= 0.1 New Zealand Dollar / (8.3% – 2.7%)
= 2.1 New Zealand Dollar
Prerequisites
It is important to point out that the most important input to discounted cash flows is the discount rate, which is, of course, the actual cash flows. If you disagree with these results, try doing the calculations yourself and test your assumptions. Additionally, DCF does not give a complete picture of a company's potential performance because it does not take into account the cyclicality of the industry or the company's future capital requirements. Given that we are considering Scott Technology as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of equity considering debt (or weighted average cost of capital, WACC). For this calculation, we used 8.3% based on a leverage beta of 1.224. Beta is a measure of a stock's volatility compared to the market as a whole. Beta values are derived from industry average beta values for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of Scott Technology
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For the future:
Although important, DCF calculations are only one of many factors that businesses need to evaluate. The DCF model is not the ultimate in investment valuation. Rather, the best use of DCF models is to test certain assumptions and 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. There are three related items regarding Scott Technology that require further investigation.
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risk: For example, I discovered the following: 3 warning signs for Scott Technology (1 should not be ignored!) Here's what you need to know before investing.
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future earnings: How does SCT's growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.
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Other solid businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you haven't considered before?
PS. Simply Wall St updates DCF calculations for all New Zealand stocks daily, so if you want to know the intrinsic value of other stocks, search here.
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
