Is There An Opportunity With Jubilee Metals Group PLC's (LON:JLP) 44% Undervaluation?
Jubilee Metals Group's UK£0.037 share price signals that it might be 44% undervalued
Our fair value estimate is 22% lower than Jubilee Metals Group's analyst price target of US$0.084
Today we will run through one way of estimating the intrinsic value of Jubilee Metals Group PLC (LON:JLP) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
-US$19.2m
US$21.7m
US$20.0m
US$19.2m
US$18.7m
US$18.5m
US$18.6m
US$18.7m
US$19.0m
US$19.3m
Growth Rate Estimate Source
Analyst x2
Analyst x2
Analyst x1
Est @ -4.41%
Est @ -2.33%
Est @ -0.87%
Est @ 0.16%
Est @ 0.87%
Est @ 1.37%
Est @ 1.72%
Present Value ($, Millions) Discounted @ 7.8%
-US$17.8
US$18.7
US$16.0
US$14.2
US$12.8
US$11.8
US$11.0
US$10.3
US$9.7
US$9.1
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$96m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$19m× (1 + 2.5%) ÷ (7.8%– 2.5%) = US$376m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$376m÷ ( 1 + 7.8%)10= US$177m
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$273m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£0.04, 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.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Jubilee Metals Group 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 7.8%, which is based on a levered beta of 1.028. 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 Jubilee Metals Group
Strength
Debt is well covered by cash flow.
Weakness
Earnings declined over the past year.
Interest payments on debt are not well covered.
Opportunity
Annual earnings are forecast to grow faster than the British market.
Good value based on P/E ratio and estimated fair value.
Threat
Revenue is forecast to grow slower than 20% per year.
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Jubilee Metals Group, we've put together three further factors you should consider:
Risks: To that end, you should be aware of the 2 warning signs we've spotted with Jubilee Metals Group .
Future Earnings: How does JLP'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 British stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have 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.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
24 minutes ago
- Yahoo
Loungers-owner Fortress plots stay at Malmaison hotels
The owner of the Loungers bar chain and Poundstretcher, the discount retailer, is weighing a takeover of two of Britain's best-known hotel chains. Sky News has learnt that Fortress Investment Group is among the parties considering offers for Malmaison and Hotel du Vin, which sit under the same ownership structure. Cushman & Wakefield (C&W), the commercial property agent, is handling the auction. The group trades from 37 hotels in 27 UK cities, with the portfolio split almost equally between the two brands. The chains have been through a succession of owners over the last 20 years, including the private equity firm KSL Capital Partners. They are now owned by Singapore-based Frasers Hospitality Group, which reportedly paid more than £360m to acquire the group in 2015. A number of other bidders are also said to be participating in the auction, although the current valuation attached to the business was unclear. Fortress has been on a buying spree in Britain in recent years, snapping up assets including Majestic Wine. Earlier this year, the investment firm bought Loungers for about £350m, while it also explored a takeover of the supermarket chain Wm Morrison in 2021 before being beaten to a deal by buyout giant Clayton Dubilier & Rice. Fortress declined to comment, while C&W has been contacted for comment.
Yahoo
24 minutes ago
- Yahoo
Factbox-Cancelled and postponed green hydrogen projects
MADRID (Reuters) -Developers of green hydrogen have scaled back investments and scrapped projects globally as elevated production costs and weak demand for the low-carbon fuel have made many ventures unviable. Here are some projects that have been cancelled, postponed or scaled back. EUROPE ** Energy company LEAG's plans to build one of Europe's largest green energy hubs on the site of disused coal-fired power plant units in eastern Germany have been postponed indefinitely, it said in June. ** Steelmaker ArcelorMittal had planned to convert two plants in Germany to green hydrogen, but it shelved the 2.5 billion euro ($2.9 billion) plan in June despite the offer of 1.3 billion euros in public subsidies. ** Iberdrola, Europe's largest utility, scaled back its green hydrogen ambitions by almost two thirds in March 2024 after funding delays for some projects. Its 2030 production target fell to about 120,000 tons of green hydrogen a year, compared with a previous goal of 350,000 tons. ** Spain's Repsol cut its 2030 target for green hydrogen production by up to 63% in February to between 0.7 gigawatts (GW) and 1.2 GW of electrolyser capacity by the end of the decade, with Chief Executive Josu Jon Imaz highlighting the challenges of a high-cost industry heavily reliant on subsidies. ** BP said in April that it was shutting its team looking into hydrogen and liquefied natural gas (LNG) for transport. ** Shell scrapped plans for a low-carbon hydrogen plant on Norway's west coast owing to lack of demand, it said in September, days after Equinor cancelled a similar project planned for Norway. ** Oil refiner and biofuel maker Neste withdrew in October from an investment into renewable hydrogen production at its plant in Porvoo, Finland, citing challenging market conditions. AUSTRALIA ** Origin Energy said in October that it intended to exit a potential hydrogen development project in the Hunter Valley Hydrogen Hub (HVHH) in New South Wales. ** Global commodities trader Trafigura in March abandoned plans to build a A$750 million ($491.5 million) green hydrogen plant at its Port Pirie lead smelter in South Australia. ** Australian billionaire Andrew Forrest in July last year cut back plans for his company, Fortescue, to produce 15 million metric tons of green hydrogen by 2030, blaming costs and the amount of renewable energy sources needed. ** Woodside Energy, Australia's largest independent oil and gas producer, shelved two green hydrogen projects in Australia and New Zealand last September. ** The Queensland state government this year pulled funding for a A$12.5 billion plant to produce 200 tons of liquefied hydrogen by 2028, placing the future of one of Australia's largest and most advanced green hydrogen projects in serious doubt. Japanese investors Kansai Electric and Iwatani exited soon after. UNITED STATES ** U.S. startup Hy Stor Energy in September cancelled its reservation for more than 1 GW of electrolyser capacity with Norwegian electrolyser manufacturer Nel. ** Air Products said in February that it was looking to cancel plans to construct a 35 ton per day facility to produce green liquid hydrogen in Massena, New York, largely because of regulatory developments rendering existing hydroelectric power supply ineligible for the Clean Hydrogen Production Tax Credit. ASIA ** Japan's Kawasaki Heavy Industries walked away from a coal-to-hydrogen project in Latrobe last December, citing time and cost pressures. ($1 = 1.5260 Australian dollars) ($1 = 0.8613 euros) (Compiled by Pietro LombardiEditing by David Goodman) Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
24 minutes ago
- Yahoo
Green hydrogen retreat poses threat to emissions targets
By Pietro Lombardi, Nina Chestney and Riham Alkousaa MADRID/LONDON/BERLIN (Reuters) -Green hydrogen developers are cancelling projects and trimming investments around the world, raising the prospect of longer than targeted reliance on fossil fuels. The challenges facing the sector have exposed its initial ambitions as unrealistic. Hard-to-electrify industries that were seen as ideal candidates for green hydrogen, such as steelmaking and long-distance transportation, have found that transition to the low-carbon fuel looks prohibitively expensive. The gap between ambition and reality in Europe shows the extent of the reset happening within the industry, said Jun Sasamura, hydrogen manager at research company Westwood Global Energy. Only about a fifth of planned hydrogen projects across the European Union are likely to come online by the end of the decade, he said. That equates to roughly 12 GW of production capacity against an EU target of 40 GW, Westwood Global Energy data shows. "In the current state, I really don't see the EU 2030 (hydrogen production) target being reached," he added. INFLATED EXPECTATIONS Companies say that high costs and a lack of demand for green hydrogen have rendered many plans unprofitable. "Green hydrogen was an inflated expectation that has turned into a valley of disillusionment," said Miguel Stilwell d'Andrade, chief executive of Portuguese power company EDP. "What's missing is the demand. There are 400 million euros ($464.2 million) of subsidies for hydrogen in Spain and Portugal, but we need someone to buy the hydrogen." The company has several projects in advanced stages but cannot move forward because of a lack of buyers, said Ana Quelhas, EDP's hydrogen chief and co-chair of the European Renewable Hydrogen Coalition. Across the border, Spain's Iberdrola has shelved plans to increase capacity at a green hydrogen plant with electrolyser capacity of 20 MW until it finds buyers for additional output, company executive Iban Molina said at an energy event in Madrid. They are among more than a dozen large companies that have trimmed spending or shelved projects across Europe, Asia, Australia and elsewhere in recent years. Companies had scrapped or delayed more than a fifth of all European projects by the end of last year, Westwood Global Energy says. At Aurora Energy Research, Emma Woodward said: "In 2020-2021 we had this view of hydrogen and the fact it was going to be used in almost every sector that hadn't been electrified. "I think we've realised now that there are other, probably more commercially viable, alternatives for lots of sectors. Maybe we don't need as much hydrogen as initially expected." TOO EXPENSIVE Many governments have long supported development of green hydrogen - produced through electrolysis that splits water into hydrogen and oxygen using electricity from renewables - to help to decarbonise energy, transport and industry. Countries including Australia, Britain, Germany and Japan announced ambitious investment strategies they hoped would bring down costs and eventually create a profitable green hydrogen sector that would no longer need support. Production, however, remains more expensive than for natural gas and other fossil fuel-based alternatives, said Minh Khoi Le, Rystad Energy's head of hydrogen research. It is at least three times more expensive than natural gas as a fuel for power generation, for example, and twice as expensive as grey hydrogen. The latter is produced from natural gas and coal and is already used in industries such as oil refining and production of ammonia and methanol. Costs could fall by 30-40% in 10-15 years if equipment prices decline and the broader supply chain scales up, he added, while Aurora's Woodward and Westwood Global Energy's Sasamura said that green hydrogen is unlikely to become competitive before then. Only 6 million metric tons per annum (mtpa) of low-carbon hydrogen capacity - including green and blue hydrogen, which is made from gas - is either operational or under construction globally, consultancy Wood Mackenzie says. This is well below the 450 mtpa the consultancy says is needed as part of the global push for net zero greenhouse gas emissions by 2050. The EU has committed to reducing emissions by 55% from 1990 levels by 2030, en route to the 2050 target. BUYERS PRICED OUT THE MARKET The industry had counted on sectors such as steel, oil refining, cement and transport to be among the first buyers, but the expected demand has failed to materialise. German die forging company Dirostahl, which makes components for wind turbines, ships and oil and gas drill pipes, is dependent on furnaces fired by natural gas and is looking for a replacement. However, green hydrogen is still too expensive. Offers for the fuel do not come below 150 euros per megawatt hour (MWh) while natural gas can be bought for 30-35 euros/MWh, said Chief Executive Roman Diederichs. "It simply doesn't work. You might not want to call it economic suicide, but in practice it would be just that. We'd be completely uncompetitive," he said. Prices remain elevated because of the high cost of electrolysers needed for large-scale production, infrastructure bottlenecks and increased energy costs resulting from rules on what constitutes green hydrogen. Some European countries have scaled back their ambitions. Italy has recently shifted more than 600 million euros in post-pandemic funds from hydrogen to biomethane. France lowered its 2030 hydrogen electrolysis capacity target by more than 30% in April and Portugal has cut its electrolysis capacity ambitions by 45%. The Dutch government last year made sharp cuts to funds it had originally reserved for green hydrogen projects and battery development, shifting the focus of its climate fund toward the planned construction of two new nuclear plants. Several players in Australia, meanwhile, have scaled back or withdrawn from projects despite more than A$8 billion ($5.2 billion) of pledged government support. Projects that are going ahead also face delays. Rystad Energy analysts estimate that 99% of A$100 billion of projects announced for the next five years have failed to progress beyond the concept or approval stage. INFRASTRUCTURE DIFFICULTIES Another problem is that hydrogen is difficult to store because it requires high-pressure tanks, extremely low temperatures and tends to leak, making for risky transportation through old gas pipelines while awaiting new infrastructure. Spain hopes to build a 2,600 km (1,615 mile) hydrogen network and connect it to another project - the trans-European H2Med link - from the Iberian region to northwest Europe. The Spanish network should be operational around 2030, but delays of two or three years are likely for broader European infrastructure, said Arturo Gonzalo, CEO of Spanish gas grid operator Enagas. "Infrastructure is not something that happens when the market has already taken off; it is something that has to happen for the market to take off," he said. ($1 = 0.8617 euros) ($1 = 1.5340 Australian dollars)
