Understanding the Intrinsic Value of Alliance Aviation Services Limited (ASX:AQZ)

Alliance Aviation Services Limited (ASX:AQZ) Shares Could Be 28% Above Their Intrinsic Value Estimate

The projected fair value for Alliance Aviation Services is AU$2.41 based on a 2-Stage Free Cash Flow to Equity model. The current share price of AU$3.09 suggests that Alliance Aviation Services is potentially overvalued by 28%. Analysts, however, have set a price target of AU$4.59, which is 90% above our fair value estimate.

Understanding the DCF Valuation Method

Does the May share price for Alliance Aviation Services Limited (ASX:AQZ) reflect what it’s really worth? To estimate the stock’s intrinsic value, we will use the Discounted Cash Flow (DCF) model, which calculates the value of a company based on forecasted future cash flows, discounted back to their value today. Despite its complexities, the math behind DCF is relatively straightforward.

Companies can be valued in numerous ways, and a DCF model may not be perfect for every situation. However, it is widely used for its methodological approach to valuing future cash flows.

“DCF is all about the idea that a dollar in the future is less valuable than a dollar today.” — Simply Wall St

Methodology and Assumptions

We’re using the 2-stage growth model, which accounts for two stages of a company’s growth: an initial high-growth period and a subsequent stable growth phase. For the initial stage, we estimate the next ten years of cash flows based on analyst estimates or extrapolations from previous free cash flow (FCF) reports.

Here’s a summary of our 10-year free cash flow (FCF) estimate:

Year Levered FCF (A$, Millions) Present Value (A$, Millions) Discounted @ 7.6%
2024 -AU$88.9 million -AU$82.7 million
2025 -AU$80.7 million -AU$69.8 million
2026 AU$10.5 million AU$8.4 million
2027 AU$15.8 million AU$11.8 million
2028 AU$21.5 million AU$14.9 million
2029 AU$27.0 million AU$17.5 million
2030 AU$32.1 million AU$19.3 million
2031 AU$36.6 million AU$20.4 million
2032 AU$40.4 million AU$20.9 million
2033 AU$43.6 million AU$21.0 million

The Terminal Value

The second stage is known as Terminal Value (TV), representing the business’s cash flows after the initial high-growth period. Terminal Value is calculated using a conservative growth rate that does not exceed the country’s GDP growth rate. For this calculation, we used a 5-year average of the 10-year government bond yield (2.3%). Using a cost of equity of 7.6%, the calculations are as follows:

Terminal Value (TV) = FCF 2033 × (1 + g) ÷ (r – g) = AU$44 million × (1 + 2.3%) ÷ (7.6% – 2.3%) = AU$840 million

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = AU$840 million ÷ (1 + 7.6%)10 = AU$405 million

The total equity value is the sum of the present value of future cash flows, which in this case is AU$387 million. Comparing this to the current share price of AU$3.10, the company appears slightly overvalued. As with any valuation model, remember that the outputs depend heavily on the assumptions made—garbage in, garbage out.

Stock Market Analysis

SWOT Analysis for Alliance Aviation Services

Strengths Earnings growth over the past year exceeded the industry. Debt is well-covered by earnings.
Weaknesses No major weaknesses identified for AQZ.
Opportunities Annual earnings are forecast to grow faster than the Australian market. Good value based on P/E ratio compared to the estimated fair P/E ratio.
Threats Debt is not well covered by operating cash flow. Revenue is forecast to grow slower than 20% per year.

Next Steps: Further Analysis

While the DCF calculation is significant, it’s just one piece of the investment puzzle. The best use of a DCF model is to test various assumptions to see if the company appears undervalued or overvalued. For Alliance Aviation Services, further factors need examining:

Risks: We’ve identified one warning sign for Alliance Aviation Services.

Future Earnings: How does AQZ’s growth rate compare to its peers and the market? Dig deeper into analyst consensus numbers with our free analyst growth expectation chart.

High-Quality Alternatives: Do you prefer well-rounded options? Explore our interactive list of high-quality stocks you may be missing.

“The DCF model is not a be-all and end-all solution for investment valuation but a tool to test underlying assumptions and theories.” — David Maiolo

As an AI and machine learning consultant, understanding and applying mathematical models like DCF reminds me of discussions around modular arithmetic and prime factorization, topics I’ve previously explored on my blog (see: Exploring Modular Arithmetic Applications in Cryptography and AI).

By integrating rigorous mathematical analysis into practical applications, we take a systematic approach to uncovering intrinsic values, whether in finance or AI-driven algorithms. Understanding these principles encourages a balanced and evidence-based perspective, reflective of my own approach as a consultant.

AI and Stock Market

Ultimately, these methods align with broader themes I’ve discussed, such as the importance of evidence-based analysis, skepticism of unverified claims, and cautious optimism about AI’s role in our future.

Focus Keyphrase: Intrinsic Value of Alliance Aviation Services

2 replies
  1. David Maiolo
    David Maiolo says:

    This article dives deep into the intrinsic value calculation of Alliance Aviation Services using the DCF method. As an AI and machine learning consultant, I’ve applied rigorous mathematical analysis to provide a balanced and evidence-based perspective on this valuation. I hope this comprehensive review aids your investment decisions and inspires deeper understanding of financial modeling.

  2. Hope Thompson
    Hope Thompson says:

    It’s intriguing to see such a detailed breakdown of Alliance Aviation Services’ value. While I remain skeptical about where AI is heading, I’m optimistic about its applications in financial analysis. This was an eye-opening read, especially given my background in a very different industry!


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