Examining the Fair Value of Codan Limited (ASX:CDA)

2 min read | April 06, 2025 12:30 PM AEST | By Team Kalkine Media

Examining the Fair Value of Codan Limited (ASX:CDA) — Image source: Shutterstock

The Calculation

The two-stage DCF model incorporates two growth periods. Initially, we predict Codan's business cash flows over ten years using analyst estimates where available or extrapolating from past figures. The idea centers on the fact that cash paid out today is more valuable than the same amount paid in the future, hence the future cash flows are discounted back to today’s value.

After assessing the 10-year cash flow value, the next step covers cash flows beyond this period using Terminal Value calculated at a growth rate gleaned from the 5-year average of a 10-year government bond yield of 2.7%. This Terminal Value is discounted to present value using a cost of equity of 7.4%, resulting in a total equity value of AU$3.3 billion. When divided by outstanding shares, Codan emerges fair value given its current share price is AU$14.6.

The Assumptions

Determining a discounted cash flow hinges on the accuracy of the discount rate and cash flows. These are open to reevaluation for a broader perspective, acknowledging potential industry cyclicality or a company’s capital needs. For Codan, a cost of equity of 7.4%, anchored in a levered beta of 1.072, was applied from a reasonable industry beta range of 0.8 to 2.0.

SWOT Analysis for Codan

Strength: Earnings growth surpassed industry averages; debt is seen as low risk.
Weakness: Low dividend in comparison to top electronic market payers.
Opportunity: Expected annual earnings growth faster than the Australian market with share prices below fair value.
Threat: Dividends lack cash flow coverage; revenue growth projected under 20% per year.

Next Steps

While stock valuation is important, consider it alongside other factors. The DCF model isn't an exhaustive valuation tool but a guide to potential stock deviations. Codan’s financial health, future earnings, and comparison with high-quality alternatives can provide further insights for interested investors.

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