I did a DCF valuation for this stock, which I admit was more for experimental purposes. I was wondering how I could structure the valuation such that I would require minimal inputs.
Here is AEM Holdings historical results. As the different metrics show, AEM has experienced quite a few changes over the last few years. Given that AEM has had strong growth, I grant that AEM would continue to grow, but at a slower pace over the next few years. Hence, I allowed 5 years of high growth, before tapering off into the stable period. This is the first variable input.
I calculated the Cost of Capital the same manner as other DCF which I have shared about. During the stable growth period, I assumed that COC would equal the Return on Capital (ROC), which is a fair assumption. Once I had the final year ROC, I computed the CAGR from last year's ROC, and reduced the ROC at a constant rate from 2018's figures.
The second variable input I used is the growth rate in the stable period. I let this figure be 1%, lower than the inflation rate which demonstrates the low growth that would likely occur from such a mature company. I calculated the reinvestment rate from this figure, and similarly used the "CAGR" method to estimate the reinvestment rate for each year.
With these 2 simple inputs, I computed the target price to be $1.025, less than 3 cents higher than the current trading price of $0.995. This represents an upside of only 3%. The targer price should be lower though, as I had not factored in the value of equity options since the annual report had not disclosed the exercise price. Thus, my target price should be even closer to the current trading price. My DCF, though very simplistic, seems to point towards the shares being fairly valued.
I did a DCF valuation for this stock, which I admit was more for experimental purposes. I was wondering how I could structure the valuation such that I would require minimal inputs.
Here is AEM Holdings historical results. As the different metrics show, AEM has experienced quite a few changes over the last few years. Given that AEM has had strong growth, I grant that AEM would continue to grow, but at a slower pace over the next few years. Hence, I allowed 5 years of high growth, before tapering off into the stable period. This is the first variable input.
I calculated the Cost of Capital the same manner as other DCF which I have shared about. During the stable growth period, I assumed that COC would equal the Return on Capital (ROC), which is a fair assumption. Once I had the final year ROC, I computed the CAGR from last year's ROC, and reduced the ROC at a constant rate from 2018's figures.
The second variable input I used is the growth rate in the stable period. I let this figure be 1%, lower than the inflation rate which demonstrates the low growth that would likely occur from such a mature company. I calculated the reinvestment rate from this figure, and similarly used the "CAGR" method to estimate the reinvestment rate for each year.
With these 2 simple inputs, I computed the target price to be $1.025, less than 3 cents higher than the current trading price of $0.995. This represents an upside of only 3%. The targer price should be lower though, as I had not factored in the value of equity options since the annual report had not disclosed the exercise price. Thus, my target price should be even closer to the current trading price. My DCF, though very simplistic, seems to point towards the shares being fairly valued.