Assume management's growth outlook is accurate, what would that imply about revenue in 5 years?

According to the annual report, Supply Network Limited's management expects revenue growth in FY2024 to be close to or slightly above the company's 10-year average of 14%. The report also states that while it is difficult to estimate growth rates beyond FY2024, management is working on the assumption that continued strong growth is possible and that most of the new investments needed to support revenue of $350 million will be in place within 3 years.

Let's calculate the implied revenue in 5 years based on management's outlook, assuming the following growth rates:

FY2024: 14% (as per management's guidance)

FY2025 to FY2028: Assume a slightly lower growth rate of 12% per annum, considering the company's long-term average and the potential for continued strong growth.

Projected Revenue:

FY2023 (Actual): $252.3 million

FY2024: $252.3 million × (1 + 0.14) = $287.6 million

FY2025: $287.6 million × (1 + 0.12) = $322.1 million

FY2026: $322.1 million × (1 + 0.12) = $360.8 million

FY2027: $360.8 million × (1 + 0.12) = $404.1 million

FY2028: $404.1 million × (1 + 0.12) = $452.6 million

Based on these assumptions, if management's growth outlook proves to be accurate, Supply Network Limited's revenue could reach approximately $452.6 million in FY2028, which is five years from the latest financial report (FY2023).

This implies a compound annual growth rate (CAGR) of approximately 12.4% over the five-year period from FY2023 to FY2028

Ok great! what is a reasonable fair value estimate based on that forecast?

To estimate a fair value for Supply Network Limited's shares using the revenue forecast and assuming constant gross margins, we can use a discounted cash flow (DCF) valuation method. We'll use the same assumptions as in the previous valuation, but with the updated revenue projections based on management's outlook.

Assumptions:

Revenue Growth: Based on management's outlook, we assume the following revenue growth rates over the next five years: FY2024: 14.0% FY2025 to FY2028: 12.0% per annum

Gross Margin: We assume that the company's gross margin will remain steady at the FY2023 level of 42.3% (calculated as (Revenue - Changes in inventories) / Revenue).

EBIT Margin: We assume that the company's EBIT margin will remain stable at around 16.0% over the forecast period, based on its recent performance.

Tax Rate: We assume a corporate tax rate of 30%, consistent with the Australian statutory tax rate.

Discount Rate: We use a discount rate of 10%, which reflects the company's cost of capital and the risk associated with its future cash flows.

Terminal Growth Rate: Beyond the five-year forecast period, we assume a long-term growth rate of 2.5%, which is a conservative estimate of the expected growth in the broader economy.

Discounted Cash Flow (DCF) Valuation:

(in millions AUD, except per share data)

Year             FY2024 FY2025 FY2026 FY2027 FY2028 Terminal

Revenue           287.6  322.1  360.8  404.1  452.6

Gross Profit         121.7  136.3  152.6  170.9  191.4

EBIT             46.0  51.5  57.7  64.7  72.4

Less: Tax @ 30%       (13.8) (15.5) (17.3) (19.4) (21.7)

NOPAT            32.2  36.1  40.4  45.3  50.7

Free Cash Flow        32.2  36.1  40.4  45.3  50.7  519.9

Discount Factor @ 10%    0.909  0.826  0.751  0.683  0.621  0.621

Present Value of FCF     29.3  29.8  30.4  30.9  31.5  322.9

Sum of Present Values    474.8

Less: Net Debt (FY2023)   (2.2)

Equity Value         472.6

Diluted Shares Outstanding  41.6

Fair Value per Share     $11.36