IDP Education Limited's (ASX:IEL) Intrinsic Value Is Potentially 79% Above Its Share Price

Simply Wall St.

Jan 14

AdvertisementKey Insights Using the 2 Stage Free Cash Flow to Equity, IDP Education fair value estimate is AU$10.69 IDP Education is estimated to be 44% undervalued based on current share price of ...

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Using the most recent financial data, we'll take a look at whether the stock is fairly priced  by projecting its future cash flows and then discounting them to today's value.  We will use the Discounted Cash Flow (DCF) model on this occasion.  Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.  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. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. Crunching The Numbers   We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate.  To start off with, we need to estimate 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  2026202720282029203020312032203320342035 Levered FCF (A$, Millions) AU$80.6mAU$117.3mAU$121.8mAU$126.0mAU$130.3mAU$134.7mAU$139.2mAU$143.8mAU$148.6mAU$153.5mGrowth Rate Estimate SourceAnalyst x3Analyst x3Analyst x3Est @ 3.43%Est @ 3.39%Est @ 3.36%Est @ 3.34%Est @ 3.33%Est @ 3.32%Est @ 3.31% Present Value (A$, Millions) Discounted @ 7.1% AU$75.3AU$102AU$99.2AU$95.7AU$92.4AU$89.2AU$86.0AU$83.0AU$80.1AU$77.2(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$880m 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 (3.3%) 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 7.1%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$153m× (1 + 3.3%) ÷ (7.1%– 3.3%) = AU$4.2bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$4.2b÷ ( 1 + 7.1%)10= AU$2.1b 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 AU$3.0b.  To get the intrinsic value per share, we divide this by the total number of shares outstanding.  Compared to the current share price of AU$6.0, the company appears   quite undervalued    at a 44% 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:IEL Discounted Cash Flow January 14th 2026  The Assumptions  The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows.  Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 IDP Education 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 0.905. 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.   Check out our latest analysis for IDP Education SWOT Analysis for IDP EducationStrength Debt is not viewed as a risk. Dividends are covered by earnings and cash flows.  Dividend information for IEL. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Consumer Services market.Opportunity Annual earnings are forecast to grow faster than the Australian market. Trading below our estimate of fair value by more than 20%. Threat Annual revenue is forecast to grow slower than the Australian market.  What else are analysts forecasting for IEL?  Moving On:  Although the valuation of a company is important, it  ideally won't be the sole piece of analysis you scrutinize for a company.  DCF models are not the be-all and end-all of investment valuation.  Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued.  For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation.   Why is the intrinsic value higher than the current share price?   For IDP Education, we've compiled three  essential  items  you should further examine:   Risks: Take risks, for example - IDP Education has   1 warning sign   we think you should be aware of.  Future Earnings: How does IEL'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. 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.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"}}}