Today we’ll do a simple run through of a valuation method used to estimate the attractiveness of SkyCity Entertainment Group Limited (NZSE:SKC) as an investment opportunity by taking the expected future cash flows and discounting them to today’s value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There’s really not all that much to it, even though it might appear quite complex.
We generally believe that a company’s value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin with, we have to get estimates of 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Levered FCF (NZ$, Millions)
NZ$22.6m
NZ$36.2m
NZ$54.9m
NZ$70.0m
NZ$84.1m
NZ$97.0m
NZ$108.4m
NZ$118.4m
NZ$127.3m
NZ$135.4m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Analyst x1
Est @ 27.44%
Est @ 20.27%
Est @ 15.25%
Est @ 11.73%
Est @ 9.27%
Est @ 7.55%
Est @ 6.34%
Present Value (NZ$, Millions) Discounted @ 11%
NZ$20.4
NZ$29.4
NZ$40.2
NZ$46.1
NZ$50.0
NZ$51.9
NZ$52.3
NZ$51.5
NZ$49.9
NZ$47.8
(“Est” = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = NZ$439m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 3.5%. We discount the terminal cash flows to today’s value at a cost of equity of 11%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= NZ$1.9b÷ ( 1 + 11%)10= NZ$664m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is NZ$1.1b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of NZ$0.7, the company appears quite good value at a 34% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope – move a few degrees and end up in a different galaxy. Do keep this in mind.
NZSE:SKC Discounted Cash Flow September 18th 2025
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 SkyCity Entertainment 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 11%, which is based on a levered beta of 1.769. 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.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For SkyCity Entertainment Group, we’ve put together three fundamental factors you should look at:
Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for SKC’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every New Zealander stock every day, so if you want to find the intrinsic value of any other stock just search here.
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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.
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‘ Some details of this article were extracted from the following source finance.yahoo.com ’
