Intrinsic value of TransAlta Corporation - TA

Previous Close

$7.98

  Intrinsic Value

$2.65

stock screener

  Rating & Target

str. sell

-67%

Previous close

$7.98

 
Intrinsic value

$2.65

 
Up/down potential

-67%

 
Rating

str. sell

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of TA stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 2.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.73
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  2,397
  2,445
  2,501
  2,565
  2,638
  2,718
  2,805
  2,901
  3,004
  3,116
  3,235
  3,363
  3,500
  3,645
  3,799
  3,963
  4,137
  4,321
  4,515
  4,721
  4,938
  5,167
  5,408
  5,662
  5,930
  6,213
  6,510
  6,823
  7,152
  7,499
  7,863
Variable operating expenses, $m
 
  2,285
  2,337
  2,395
  2,462
  2,535
  2,615
  2,703
  2,797
  2,899
  3,009
  3,079
  3,204
  3,338
  3,479
  3,629
  3,788
  3,956
  4,134
  4,323
  4,521
  4,731
  4,952
  5,185
  5,430
  5,689
  5,961
  6,247
  6,549
  6,866
  7,200
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  1,919
  2,285
  2,337
  2,395
  2,462
  2,535
  2,615
  2,703
  2,797
  2,899
  3,009
  3,079
  3,204
  3,338
  3,479
  3,629
  3,788
  3,956
  4,134
  4,323
  4,521
  4,731
  4,952
  5,185
  5,430
  5,689
  5,961
  6,247
  6,549
  6,866
  7,200
Operating income, $m
  478
  160
  165
  170
  176
  183
  190
  198
  207
  216
  227
  284
  295
  307
  321
  334
  349
  365
  381
  398
  417
  436
  456
  478
  500
  524
  549
  576
  603
  633
  663
EBITDA, $m
  1,142
  552
  565
  580
  596
  614
  634
  655
  679
  704
  731
  760
  791
  824
  859
  896
  935
  976
  1,020
  1,067
  1,116
  1,167
  1,222
  1,279
  1,340
  1,404
  1,471
  1,542
  1,616
  1,694
  1,777
Interest expense (income), $m
  235
  212
  220
  229
  239
  251
  263
  277
  292
  309
  326
  345
  365
  387
  410
  434
  460
  487
  516
  547
  579
  614
  650
  688
  728
  770
  815
  862
  911
  963
  1,018
Earnings before tax, $m
  314
  -52
  -56
  -59
  -63
  -68
  -73
  -79
  -85
  -92
  -100
  -61
  -70
  -79
  -89
  -100
  -111
  -123
  -135
  -149
  -163
  -178
  -194
  -210
  -228
  -246
  -266
  -286
  -308
  -331
  -355
Tax expense, $m
  38
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  169
  -52
  -56
  -59
  -63
  -68
  -73
  -79
  -85
  -92
  -100
  -61
  -70
  -79
  -89
  -100
  -111
  -123
  -135
  -149
  -163
  -178
  -194
  -210
  -228
  -246
  -266
  -286
  -308
  -331
  -355

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  362
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  10,996
  10,866
  11,116
  11,402
  11,723
  12,078
  12,468
  12,893
  13,352
  13,848
  14,379
  14,948
  15,554
  16,200
  16,887
  17,615
  18,387
  19,204
  20,068
  20,981
  21,945
  22,963
  24,035
  25,166
  26,357
  27,612
  28,933
  30,324
  31,787
  33,327
  34,946
Adjusted assets (=assets-cash), $m
  10,634
  10,866
  11,116
  11,402
  11,723
  12,078
  12,468
  12,893
  13,352
  13,848
  14,379
  14,948
  15,554
  16,200
  16,887
  17,615
  18,387
  19,204
  20,068
  20,981
  21,945
  22,963
  24,035
  25,166
  26,357
  27,612
  28,933
  30,324
  31,787
  33,327
  34,946
Revenue / Adjusted assets
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
  0.225
Average production assets, $m
  1,696
  1,731
  1,771
  1,816
  1,867
  1,924
  1,986
  2,054
  2,127
  2,206
  2,291
  2,381
  2,478
  2,581
  2,690
  2,806
  2,929
  3,059
  3,197
  3,342
  3,496
  3,658
  3,829
  4,009
  4,199
  4,399
  4,609
  4,831
  5,064
  5,309
  5,567
Working capital, $m
  337
  626
  640
  657
  675
  696
  718
  743
  769
  798
  828
  861
  896
  933
  973
  1,015
  1,059
  1,106
  1,156
  1,209
  1,264
  1,323
  1,384
  1,450
  1,518
  1,590
  1,667
  1,747
  1,831
  1,920
  2,013
Total debt, $m
  4,361
  4,156
  4,324
  4,515
  4,730
  4,968
  5,230
  5,514
  5,822
  6,154
  6,510
  6,891
  7,297
  7,730
  8,190
  8,678
  9,195
  9,743
  10,322
  10,933
  11,579
  12,261
  12,980
  13,737
  14,535
  15,376
  16,261
  17,193
  18,173
  19,205
  20,290
Total liabilities, $m
  7,485
  7,280
  7,448
  7,639
  7,854
  8,092
  8,354
  8,638
  8,946
  9,278
  9,634
  10,015
  10,421
  10,854
  11,314
  11,802
  12,319
  12,867
  13,446
  14,057
  14,703
  15,385
  16,104
  16,861
  17,659
  18,500
  19,385
  20,317
  21,297
  22,329
  23,414
Total equity, $m
  3,511
  3,586
  3,668
  3,763
  3,869
  3,986
  4,114
  4,255
  4,406
  4,570
  4,745
  4,933
  5,133
  5,346
  5,573
  5,813
  6,068
  6,337
  6,623
  6,924
  7,242
  7,578
  7,932
  8,305
  8,698
  9,112
  9,548
  10,007
  10,490
  10,998
  11,532
Total liabilities and equity, $m
  10,996
  10,866
  11,116
  11,402
  11,723
  12,078
  12,468
  12,893
  13,352
  13,848
  14,379
  14,948
  15,554
  16,200
  16,887
  17,615
  18,387
  19,204
  20,069
  20,981
  21,945
  22,963
  24,036
  25,166
  26,357
  27,612
  28,933
  30,324
  31,787
  33,327
  34,946
Debt-to-equity ratio
  1.242
  1.160
  1.180
  1.200
  1.220
  1.250
  1.270
  1.300
  1.320
  1.350
  1.370
  1.400
  1.420
  1.450
  1.470
  1.490
  1.520
  1.540
  1.560
  1.580
  1.600
  1.620
  1.640
  1.650
  1.670
  1.690
  1.700
  1.720
  1.730
  1.750
  1.760
Adjusted equity ratio
  0.296
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  169
  -52
  -56
  -59
  -63
  -68
  -73
  -79
  -85
  -92
  -100
  -61
  -70
  -79
  -89
  -100
  -111
  -123
  -135
  -149
  -163
  -178
  -194
  -210
  -228
  -246
  -266
  -286
  -308
  -331
  -355
Depreciation, amort., depletion, $m
  664
  393
  401
  410
  420
  431
  444
  457
  472
  488
  505
  476
  496
  516
  538
  561
  586
  612
  639
  668
  699
  732
  766
  802
  840
  880
  922
  966
  1,013
  1,062
  1,113
Funds from operations, $m
  817
  341
  345
  351
  357
  363
  371
  378
  387
  395
  405
  415
  426
  437
  449
  461
  475
  489
  504
  520
  536
  554
  572
  592
  612
  633
  656
  680
  705
  731
  759
Change in working capital, $m
  73
  12
  14
  16
  18
  20
  22
  24
  26
  29
  31
  33
  35
  37
  40
  42
  44
  47
  50
  53
  56
  59
  62
  65
  69
  72
  76
  80
  84
  89
  93
Cash from operations, $m
  744
  328
  330
  334
  338
  343
  348
  354
  360
  367
  374
  382
  391
  400
  409
  420
  430
  442
  454
  467
  481
  495
  510
  526
  543
  561
  580
  600
  621
  642
  666
Maintenance CAPEX, $m
  0
  -339
  -346
  -354
  -363
  -373
  -385
  -397
  -411
  -425
  -441
  -458
  -476
  -496
  -516
  -538
  -561
  -586
  -612
  -639
  -668
  -699
  -732
  -766
  -802
  -840
  -880
  -922
  -966
  -1,013
  -1,062
New CAPEX, $m
  -379
  -35
  -40
  -46
  -51
  -57
  -62
  -68
  -73
  -79
  -85
  -91
  -97
  -103
  -109
  -116
  -123
  -130
  -138
  -145
  -154
  -162
  -171
  -180
  -190
  -200
  -210
  -222
  -233
  -245
  -258
Cash from investing activities, $m
  -327
  -374
  -386
  -400
  -414
  -430
  -447
  -465
  -484
  -504
  -526
  -549
  -573
  -599
  -625
  -654
  -684
  -716
  -750
  -784
  -822
  -861
  -903
  -946
  -992
  -1,040
  -1,090
  -1,144
  -1,199
  -1,258
  -1,320
Free cash flow, $m
  417
  -46
  -56
  -66
  -76
  -87
  -99
  -111
  -124
  -137
  -152
  -167
  -182
  -199
  -216
  -235
  -254
  -274
  -295
  -318
  -341
  -366
  -392
  -419
  -448
  -478
  -510
  -544
  -579
  -615
  -654
Issuance/(repayment) of debt, $m
  -58
  157
  167
  191
  215
  238
  261
  284
  308
  332
  356
  381
  406
  433
  460
  488
  517
  547
  579
  612
  646
  682
  719
  758
  798
  841
  885
  932
  980
  1,031
  1,085
Issuance/(repurchase) of shares, $m
  0
  127
  138
  153
  169
  185
  202
  219
  237
  256
  275
  249
  270
  292
  316
  340
  366
  393
  421
  450
  481
  514
  548
  583
  621
  660
  702
  745
  791
  839
  889
Cash from financing (excl. dividends), $m  
  -52
  284
  305
  344
  384
  423
  463
  503
  545
  588
  631
  630
  676
  725
  776
  828
  883
  940
  1,000
  1,062
  1,127
  1,196
  1,267
  1,341
  1,419
  1,501
  1,587
  1,677
  1,771
  1,870
  1,974
Total cash flow (excl. dividends), $m
  362
  239
  250
  279
  308
  336
  364
  392
  421
  450
  479
  463
  494
  526
  559
  594
  629
  666
  704
  744
  786
  829
  874
  922
  971
  1,023
  1,077
  1,133
  1,193
  1,255
  1,320
Retained Cash Flow (-), $m
  -150
  -127
  -138
  -153
  -169
  -185
  -202
  -219
  -237
  -256
  -275
  -249
  -270
  -292
  -316
  -340
  -366
  -393
  -421
  -450
  -481
  -514
  -548
  -583
  -621
  -660
  -702
  -745
  -791
  -839
  -889
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  112
  112
  126
  139
  151
  162
  173
  184
  194
  204
  214
  224
  234
  244
  254
  263
  273
  284
  294
  305
  315
  327
  338
  350
  362
  375
  388
  402
  416
  431
Discount rate, %
 
  8.30
  8.72
  9.15
  9.61
  10.09
  10.59
  11.12
  11.68
  12.26
  12.88
  13.52
  14.20
  14.91
  15.65
  16.43
  17.26
  18.12
  19.02
  19.97
  20.97
  22.02
  23.12
  24.28
  25.49
  26.77
  28.11
  29.51
  30.99
  32.54
  34.16
PV of cash for distribution, $m
 
  103
  95
  97
  96
  93
  89
  83
  76
  69
  61
  53
  46
  38
  32
  26
  21
  16
  12
  9
  7
  5
  3
  2
  2
  1
  1
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  95.1
  90.1
  85.0
  79.9
  74.8
  69.8
  64.8
  60.1
  55.5
  51.1
  47.5
  44.1
  40.7
  37.6
  34.6
  31.7
  29.0
  26.5
  24.2
  22.0
  20.0
  18.1
  16.4
  14.8
  13.3
  12.0
  10.8
  9.7
  8.7
  7.8

TransAlta Corporation (TransAlta) is a non-regulated electricity generation and energy marketing company with an aggregate net ownership interest of approximately 8,720 megawatts of generating capacity. The Company is engaged in the production and sale of electric energy. It focuses on generating and marketing electricity in Canada, the United States and Western Australia through its diversified portfolio of facilities fuelled by coal, natural gas, diesel, hydro, wind and solar. TransAlta is organized into eight business segments: Canadian Coal, U.S. Coal, Canadian Gas, Australian Gas, Wind and Solar, Hydro, Energy Marketing and Corporate. The Canadian Coal, U.S. Coal, Canadian Gas, Australian Gas, Wind and Solar, and Hydro segments are responsible for constructing, operating and maintaining its electrical generation. All the segments are supported by a Corporate segment, which includes the Corporation's central financial, legal, administrative, and investing functions.

FINANCIAL RATIOS  of  TransAlta Corporation (TA)

Valuation Ratios
P/E Ratio 13.6
Price to Sales 1
Price to Book 0.7
Price to Tangible Book
Price to Cash Flow 3.1
Price to Free Cash Flow 6.3
Growth Rates
Sales Growth Rate 5.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -24.5%
Cap. Spend. - 3 Yr. Gr. Rate -9.1%
Financial Strength
Quick Ratio 1
Current Ratio 0.3
LT Debt to Equity 106%
Total Debt to Equity 124.2%
Interest Coverage 2
Management Effectiveness
Return On Assets 3.4%
Ret/ On Assets - 3 Yr. Avg. 3%
Return On Total Capital 2.1%
Ret/ On T. Cap. - 3 Yr. Avg. 1.6%
Return On Equity 4.9%
Return On Equity - 3 Yr. Avg. 3.8%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 50.6%
EBITDA Margin - 3 Yr. Avg. 46.1%
Operating Margin 19.9%
Oper. Margin - 3 Yr. Avg. 14.4%
Pre-Tax Margin 13.1%
Pre-Tax Margin - 3 Yr. Avg. 10.7%
Net Profit Margin 7.1%
Net Profit Margin - 3 Yr. Avg. 5%
Effective Tax Rate 12.1%
Eff/ Tax Rate - 3 Yr. Avg. 20.8%
Payout Ratio 65.7%

TA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TA stock intrinsic value calculation we used $2397 million for the last fiscal year's total revenue generated by TransAlta Corporation. The default revenue input number comes from 2016 income statement of TransAlta Corporation. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our TA stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 8.3%, whose default value for TA is calculated based on our internal credit rating of TransAlta Corporation, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of TransAlta Corporation.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of TA stock the variable cost ratio is equal to 93.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for TA stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.3% for TransAlta Corporation.

Corporate tax rate of 27% is the nominal tax rate for TransAlta Corporation. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the TA stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for TA are equal to 70.8%.

Life of production assets of 3.3 years is the average useful life of capital assets used in TransAlta Corporation operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for TA is equal to 25.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $3511 million for TransAlta Corporation - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 287.248 million for TransAlta Corporation is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of TransAlta Corporation at the current share price and the inputted number of shares is $2.3 billion.

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Financial statements of TA
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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