Argent Industrial Instrinsic Value Calculation

What do I think the fair value per share is?

In this post I will be going over my valuation model for Argent Industrial (JSE: ART) and determining what I think is the fair value for the business and based on this assessment I will determine whether I believe the stock is a buy, hold or sell.

I have valued the business using a discounted cash flow model to determine the enterprise value of the company. After this I have adjusted for net debt to determine what the equity value per share of the company is. Any valuation model is only as good as the inputs used and the assumptions thereof. So lets break down my assumptions.

Going forward I have assumed a tax rate of 27%. The SA corporate tax rate is 27% effective from 31 March 2023 that is what I have based my assumption on. Historically the company has a had an effective tax rate slightly lower than corporate tax rate, but I have taken the conservative view that this will not be the case going forward.

For the discount rate I have used 19.95%. Which I have calculated using the current yield on the South African 2030 government bonds of 10.38% as my risk free rate of return plus an equity risk premium of 9.57% based on the table of equity risk premiums per country published by NYU. 

For the perpetual growth rate, I have assumed 3%, which is slightly lower than the forecasted growth rate of the global manufacturing industry per Statista over the next five years.

For the exit EV/EBITDA multiple I have used 3.16 which is the 5-year average EV/EBITDA multiple of the stock. I believe this to be highly conservative and would be surprised if the counter had to rerate slightly above this in the next five years. Debt and cash figures have been obtained directly from the balance sheet as at year-end.

During the valuation period I have assumed EBIT growth of 10% for the valuation period. I believe this is still very conservative given Argent have been able to growth EBIT at a CAGR of 20.52% over the past 5 years.

I have assumed depreciation and amortisation to be R60m a year for the next year 5 years. Over the past five years this has been closer to R55m but have forecasted an increase given the increased capex forecasted.

For capex I have used the 2023 capital expenditure per the cash flow statement as a starting point and forecasted capex growth of 10% per annum inline with forecasted EBIT growth. Lastly for changes in net working capital I have forecasted a decrease of R120m as a starting point based on the past two years financial data and grown this by 10% in line with EBIT growth. 

When all of this is put together, I derive an intrinsic value per share of R21.69 compared to the current share price of R16.32. I thus have a target upside of 33% based on my fair value estimate and given this large margin of safety I deem the stock a buy. Please note this is just my opinion based on my assumptions and is not financial advice by any means.