Computershare Limited's (ASX:CPU) Intrinsic Value Is Potentially 36% Above Its Share Price

Simply Wall St.

Jan 05

AdvertisementKey Insights The projected fair value for Computershare is AU$46.33 based on 2 Stage Free Cash Flow to Equity Computershare is estimated to be 26% undervalued based on current share ...

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We will take advantage of the Discounted Cash Flow (DCF) model for this purpose.  Don't get put off by the jargon, the math behind it is actually quite straightforward.  We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios.  For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. Crunching The Numbers   We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period.  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.   A DCF is all about the idea that a dollar in the future is less valuable than a dollar today,  and so the sum of these future cash flows is then discounted to today's value:  10-year free cash flow (FCF) estimate  2026202720282029203020312032203320342035 Levered FCF ($, Millions) US$704.6mUS$690.6mUS$699.8mUS$759.3mUS$779.8mUS$802.2mUS$826.3mUS$851.8mUS$878.7mUS$906.8mGrowth Rate Estimate SourceAnalyst x3Analyst x3Analyst x3Analyst x1Est @ 2.69%Est @ 2.87%Est @ 3.00%Est @ 3.09%Est @ 3.15%Est @ 3.20% Present Value ($, Millions) Discounted @ 7.1% US$658US$602US$570US$578US$554US$532US$512US$493US$475US$458(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$5.4b We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period.  The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.1%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$907m× (1 + 3.3%) ÷ (7.1%– 3.3%) = US$25bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$25b÷ ( 1 + 7.1%)10= US$13b The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value,  which in this case is US$18b.  To get the intrinsic value per share, we divide this by the total number of shares outstanding.  Relative to the current share price of AU$34.2, the company appears   a touch undervalued    at a 26% discount to where the stock price trades currently.   The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. ASX:CPU Discounted Cash Flow January 5th 2026  The Assumptions  Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows.  If you don't agree with these result, have a go at the calculation yourself and play with the assumptions.  The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance.  Given that we are looking at Computershare 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 accounts for debt.  In this calculation we've used 7.1%, which is based on a levered beta of 0.898. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.   See our latest analysis for Computershare SWOT Analysis for ComputershareStrength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Dividends are covered by earnings and cash flows.  Dividend information for CPU. Weakness Earnings growth over the past year is below its 5-year average. Dividend is low compared to the top 25% of dividend payers in the Professional Services market.Opportunity Annual earnings are forecast to grow for the next 3 years. Good value based on P/E ratio and estimated fair value. Threat  Annual earnings are forecast to grow slower than the Australian market.  What else are analysts forecasting for CPU?  Moving On:  Although the valuation of a company is important, it  is only one of many factors that you need to assess for a company.  It's not possible to obtain a foolproof valuation with a DCF model.  Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation.  If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different.   Why is the intrinsic value higher than the current share price?   For Computershare, we've compiled three  relevant  aspects  you should consider:   Risks: Consider for instance, the ever-present spectre of investment risk.   We've identified 1 warning sign  with Computershare , and understanding this should be part of your investment process.  Future Earnings: How does CPU'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 Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!   PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX every day. If you want to find the calculation for other stocks just search here.New: AI Stock Screener & AlertsOur new AI Stock Screener scans the market every day to uncover opportunities.• Dividend Powerhouses (3%+ Yield)• Undervalued Small Caps with Insider Buying• High growth Tech and AI CompaniesOr build your own from over 50 metrics.Explore Now for FreeHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"}}}