Is Aristocrat Leisure Limited (ASX:ALL) Trading At A 26% Discount?

In This Article:

Key Insights

  • The projected fair value for Aristocrat Leisure is AU$78.97 based on 2 Stage Free Cash Flow to Equity

  • Aristocrat Leisure's AU$58.17 share price signals that it might be 26% undervalued

  • The AU$55.03 analyst price target for ALL is 30% less than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Aristocrat Leisure Limited (ASX:ALL) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Aristocrat Leisure

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF (A$, Millions)

AU$1.63b

AU$1.82b

AU$2.00b

AU$2.23b

AU$2.40b

AU$2.55b

AU$2.68b

AU$2.79b

AU$2.89b

AU$2.99b

Growth Rate Estimate Source

Analyst x4

Analyst x4

Analyst x2

Analyst x1

Est @ 7.72%

Est @ 6.13%

Est @ 5.01%

Est @ 4.23%

Est @ 3.69%

Est @ 3.30%

Present Value (A$, Millions) Discounted @ 7.0%

AU$1.5k

AU$1.6k

AU$1.6k

AU$1.7k

AU$1.7k

AU$1.7k

AU$1.7k

AU$1.6k

AU$1.6k

AU$1.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$16b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.0%.