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In assessing the fair value of Transurban Group (ASX:TCL), a notable player in ASX infrastructure stocks, we utilize the 2 Stage Free Cash Flow to Equity model, arriving at an estimated fair value of AU$12.29. Considering that the current share price is AU$12.45, Transurban Group appears to be trading in close proximity to its estimated fair value within the realm of ASX infrastructure stocks. It's important to note that the AU$14.11 analyst price target for TCL exceeds our fair value estimate by 15%.
Introduction to the Valuation Approach
To estimate the intrinsic value of ASX TCL, classified among ASX infrastructure stocks, we employ the Discounted Cash Flow (DCF) model. This method involves estimating the company's future cash flows and discounting them to their present value. While there are various methods to determine a company's value, the DCF model provides a comprehensive approach, especially when evaluating ASX infrastructure stocks.
Step-by-Step Calculation
We opt for the 2-stage growth model, which involves considering two stages of the company's growth. The initial stage assumes a higher growth rate, while the second stage assumes a stable growth rate. The process begins with obtaining estimates for the next ten years of cash flows, keeping in mind the dynamics of ASX infrastructure stocks. Analyst estimates are utilized where available; however, if these are unavailable, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. In cases where companies exhibit shrinking free cash flow, we assume a slowing rate of shrinkage. Conversely, for companies with growing free cash flow, we anticipate a deceleration in the growth rate over this period. This approach accounts for the tendency of growth to slow more in the early years than in later years, a crucial factor when evaluating ASX infrastructure stocks.
In the valuation of Transurban Group, positioned within the domain of ASX infrastructure stocks, the fair value estimate of AU$12.29 is derived from this detailed process. The proximity of this estimate to the current share price suggests that the market is valuing the company in line with our calculation. However, it's noteworthy that the analyst price target of AU$14.11 implies a 15% premium over our fair value estimate. Investors keen on ASX infrastructure stocks should consider multiple approaches and factors when making investment decisions, as different models may yield varying results.
