Shares of Nanosonics Limited (ASX:NAN) Might Be Trading at 24% Below Their Estimated Intrinsic Value

January 23, 2025 05:23 PM AEDT | By Team Kalkine Media

Shares of Nanosonics Limited (ASX:NAN) Might Be Trading at 24% Below Their Estimated Intrinsic Value

The Methodology

The 2-stage model is utilized to project cash flows, divided into two periods of growth: an initial phase of higher growth followed by a slower growth phase. We begin with assessing forecasted cash flows for the next ten years, relying on analyst estimates or extrapolating recent data when necessary.

The present value of these cash flows is AU$351m. Moving to the terminal value, which considers the business's cash flow after the two growth phases, we use conservative growth rates based on government bond yields, resulting in a terminal value of AU$1.2b.

Key Assumptions

The total equity value, combining both cash flow stages, stands at AU$1.5b. When divided by the outstanding shares, the stock appears undervalued at a 24% discount. Yet, it's crucial to recognize the influence of assumptions such as discount rates and cash flows in the evaluation. The DCF approach doesn’t account for industry cycles or future capital needs, offering just a snapshot of potential performance.

Strengths and Concerns

Nanosonics currently boasts a debt-free status and solid balance sheet, though its earnings have recently declined. Projected earnings growth outpaces the broader Australian market, positioning it attractively despite cautious revenue forecasts. As a snapshot, ASX:NAN offers a fascinating view into valuation complexities, reminders of the potential within, and elements warranting further examination.

Looking Ahead

Valuation is just one piece of the puzzle for assessing a company like Nanosonics. When evaluating, consider different scenarios that might impact valuation, such as changes in cost of equity. Explore potential risks, compare growth rates with peers and wider market forecasts, and investigate other solid businesses with low debt and strong equity returns.

In conclusion, while DCF provides an intriguing estimate of Nanosonics' value, comprehensive analysis involves blending insights from various angles for a balanced view.

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