Is Rattler Midstream LP (NASDAQ:RTLR) Trading At A 50% Discount?
Does the November share price for Rattler Midstream LP (NASDAQ:RTLR) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
View our latest analysis for Rattler Midstream
Crunching the numbers
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
| Levered FCF ($, Millions) | US$89.5m | US$8.65m | US$149.0m | US$164.0m | US$175.2m | US$184.7m | US$193.0m | US$200.3m | US$207.0m | US$213.2m |
| Growth Rate Estimate Source | Analyst x4 | Analyst x2 | Analyst x1 | Analyst x1 | Est @ 6.83% | Est @ 5.44% | Est @ 4.48% | Est @ 3.8% | Est @ 3.33% | Est @ 2.99% |
| Present Value ($, Millions) Discounted @ 9.9% | US$81.4 | US$7.2 | US$112 | US$112 | US$109 | US$105 | US$99.5 | US$93.9 | US$88.3 | US$82.7 |
| ("Est" = FCF growth rate estimated by Simply Wall St) The second stage is also known as Terminal Value, this is the business's cash flow after 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 (2.2%) 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 9.9%. Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$213m× (1 + 2.2%) ÷ (9.9%– 2.2%) = US$2.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.8b÷ ( 1 + 9.9%)10= US$1.1b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.0b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$6.6, the company appears quite good value at a 50% 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. |