Intrinsic value of TransAlta Corporation - TA

Previous Close

$7.84

  Intrinsic Value

$2.70

stock screener

  Rating & Target

str. sell

-66%

Previous close

$7.84

 
Intrinsic value

$2.70

 
Up/down potential

-66%

 
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
  2.20
  2.48
  2.73
  2.96
  3.16
  3.35
  3.51
  3.66
  3.79
  3.92
  4.02
  4.12
  4.21
  4.29
  4.36
  4.42
  4.48
  4.53
  4.58
  4.62
  4.66
  4.69
  4.72
  4.75
  4.78
  4.80
  4.82
  4.84
  4.85
  4.87
Revenue, $m
  2,397
  2,450
  2,510
  2,579
  2,655
  2,739
  2,831
  2,930
  3,038
  3,153
  3,276
  3,408
  3,549
  3,698
  3,857
  4,025
  4,203
  4,391
  4,590
  4,801
  5,022
  5,256
  5,503
  5,763
  6,037
  6,325
  6,629
  6,948
  7,284
  7,638
  8,010
Variable operating expenses, $m
 
  2,289
  2,345
  2,408
  2,478
  2,555
  2,639
  2,730
  2,828
  2,933
  3,046
  3,121
  3,249
  3,386
  3,531
  3,685
  3,848
  4,021
  4,203
  4,396
  4,599
  4,813
  5,039
  5,277
  5,528
  5,792
  6,070
  6,362
  6,670
  6,994
  7,334
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
  2,289
  2,345
  2,408
  2,478
  2,555
  2,639
  2,730
  2,828
  2,933
  3,046
  3,121
  3,249
  3,386
  3,531
  3,685
  3,848
  4,021
  4,203
  4,396
  4,599
  4,813
  5,039
  5,277
  5,528
  5,792
  6,070
  6,362
  6,670
  6,994
  7,334
Operating income, $m
  478
  160
  165
  171
  178
  185
  192
  201
  210
  220
  230
  288
  299
  312
  325
  340
  355
  370
  387
  405
  424
  443
  464
  486
  509
  534
  559
  586
  614
  644
  676
EBITDA, $m
  1,142
  554
  567
  583
  600
  619
  640
  662
  686
  712
  740
  770
  802
  836
  871
  909
  950
  992
  1,037
  1,085
  1,135
  1,188
  1,243
  1,302
  1,364
  1,429
  1,498
  1,570
  1,646
  1,726
  1,810
Interest expense (income), $m
  235
  212
  221
  231
  241
  254
  267
  281
  297
  314
  332
  352
  372
  395
  418
  443
  470
  498
  527
  559
  592
  627
  664
  703
  744
  787
  833
  881
  931
  984
  1,040
Earnings before tax, $m
  314
  -52
  -56
  -59
  -64
  -69
  -74
  -80
  -87
  -94
  -102
  -64
  -73
  -83
  -93
  -104
  -115
  -127
  -140
  -154
  -168
  -184
  -200
  -217
  -235
  -254
  -274
  -294
  -317
  -340
  -364
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
  -64
  -69
  -74
  -80
  -87
  -94
  -102
  -64
  -73
  -83
  -93
  -104
  -115
  -127
  -140
  -154
  -168
  -184
  -200
  -217
  -235
  -254
  -274
  -294
  -317
  -340
  -364

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
  10,888
  11,158
  11,463
  11,802
  12,175
  12,582
  13,024
  13,501
  14,013
  14,562
  15,148
  15,772
  16,436
  17,141
  17,888
  18,680
  19,517
  20,401
  21,336
  22,322
  23,362
  24,458
  25,614
  26,831
  28,113
  29,462
  30,882
  32,375
  33,947
  35,599
Adjusted assets (=assets-cash), $m
  10,634
  10,888
  11,158
  11,463
  11,802
  12,175
  12,582
  13,024
  13,501
  14,013
  14,562
  15,148
  15,772
  16,436
  17,141
  17,888
  18,680
  19,517
  20,401
  21,336
  22,322
  23,362
  24,458
  25,614
  26,831
  28,113
  29,462
  30,882
  32,375
  33,947
  35,599
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
  1,734
  1,777
  1,826
  1,880
  1,939
  2,004
  2,075
  2,151
  2,232
  2,320
  2,413
  2,513
  2,618
  2,731
  2,850
  2,976
  3,109
  3,250
  3,399
  3,556
  3,722
  3,896
  4,080
  4,274
  4,478
  4,693
  4,919
  5,157
  5,408
  5,671
Working capital, $m
  337
  627
  643
  660
  680
  701
  725
  750
  778
  807
  839
  873
  908
  947
  987
  1,030
  1,076
  1,124
  1,175
  1,229
  1,286
  1,346
  1,409
  1,475
  1,545
  1,619
  1,697
  1,779
  1,865
  1,955
  2,051
Total debt, $m
  4,361
  4,171
  4,352
  4,556
  4,783
  5,033
  5,306
  5,602
  5,922
  6,265
  6,633
  7,025
  7,443
  7,888
  8,361
  8,861
  9,391
  9,952
  10,545
  11,171
  11,832
  12,528
  13,263
  14,037
  14,853
  15,711
  16,615
  17,567
  18,567
  19,620
  20,727
Total liabilities, $m
  7,485
  7,295
  7,476
  7,680
  7,907
  8,157
  8,430
  8,726
  9,046
  9,389
  9,757
  10,149
  10,567
  11,012
  11,485
  11,985
  12,515
  13,076
  13,669
  14,295
  14,956
  15,652
  16,387
  17,161
  17,977
  18,835
  19,739
  20,691
  21,691
  22,744
  23,851
Total equity, $m
  3,511
  3,593
  3,682
  3,783
  3,895
  4,018
  4,152
  4,298
  4,455
  4,624
  4,805
  4,999
  5,205
  5,424
  5,657
  5,903
  6,164
  6,440
  6,732
  7,041
  7,366
  7,709
  8,071
  8,453
  8,854
  9,277
  9,722
  10,191
  10,684
  11,202
  11,748
Total liabilities and equity, $m
  10,996
  10,888
  11,158
  11,463
  11,802
  12,175
  12,582
  13,024
  13,501
  14,013
  14,562
  15,148
  15,772
  16,436
  17,142
  17,888
  18,679
  19,516
  20,401
  21,336
  22,322
  23,361
  24,458
  25,614
  26,831
  28,112
  29,461
  30,882
  32,375
  33,946
  35,599
Debt-to-equity ratio
  1.242
  1.160
  1.180
  1.200
  1.230
  1.250
  1.280
  1.300
  1.330
  1.350
  1.380
  1.410
  1.430
  1.450
  1.480
  1.500
  1.520
  1.550
  1.570
  1.590
  1.610
  1.630
  1.640
  1.660
  1.680
  1.690
  1.710
  1.720
  1.740
  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
  -64
  -69
  -74
  -80
  -87
  -94
  -102
  -64
  -73
  -83
  -93
  -104
  -115
  -127
  -140
  -154
  -168
  -184
  -200
  -217
  -235
  -254
  -274
  -294
  -317
  -340
  -364
Depreciation, amort., depletion, $m
  664
  393
  402
  412
  422
  434
  447
  461
  477
  493
  510
  483
  503
  524
  546
  570
  595
  622
  650
  680
  711
  744
  779
  816
  855
  896
  939
  984
  1,031
  1,082
  1,134
Funds from operations, $m
  817
  342
  346
  352
  359
  365
  373
  381
  389
  399
  408
  419
  430
  441
  453
  466
  480
  494
  510
  526
  543
  561
  579
  599
  620
  642
  665
  689
  715
  742
  770
Change in working capital, $m
  73
  13
  16
  18
  20
  22
  23
  25
  27
  30
  32
  34
  36
  38
  41
  43
  46
  48
  51
  54
  57
  60
  63
  67
  70
  74
  78
  82
  86
  91
  95
Cash from operations, $m
  744
  328
  331
  335
  339
  344
  349
  355
  362
  369
  377
  385
  394
  403
  413
  423
  434
  446
  459
  472
  486
  501
  516
  533
  550
  568
  587
  608
  629
  651
  675
Maintenance CAPEX, $m
  0
  -339
  -347
  -355
  -365
  -376
  -388
  -401
  -415
  -430
  -446
  -464
  -483
  -503
  -524
  -546
  -570
  -595
  -622
  -650
  -680
  -711
  -744
  -779
  -816
  -855
  -896
  -939
  -984
  -1,031
  -1,082
New CAPEX, $m
  -379
  -38
  -43
  -49
  -54
  -59
  -65
  -70
  -76
  -82
  -87
  -93
  -99
  -106
  -112
  -119
  -126
  -133
  -141
  -149
  -157
  -166
  -175
  -184
  -194
  -204
  -215
  -226
  -238
  -250
  -263
Cash from investing activities, $m
  -327
  -377
  -390
  -404
  -419
  -435
  -453
  -471
  -491
  -512
  -533
  -557
  -582
  -609
  -636
  -665
  -696
  -728
  -763
  -799
  -837
  -877
  -919
  -963
  -1,010
  -1,059
  -1,111
  -1,165
  -1,222
  -1,281
  -1,345
Free cash flow, $m
  417
  -50
  -59
  -69
  -80
  -91
  -103
  -116
  -129
  -143
  -157
  -172
  -188
  -205
  -223
  -242
  -262
  -282
  -304
  -327
  -351
  -376
  -403
  -431
  -460
  -491
  -523
  -557
  -593
  -631
  -670
Issuance/(repayment) of debt, $m
  -58
  172
  181
  204
  227
  250
  273
  296
  319
  343
  368
  393
  418
  445
  472
  501
  530
  561
  593
  626
  661
  697
  735
  774
  815
  859
  904
  951
  1,001
  1,053
  1,107
Issuance/(repurchase) of shares, $m
  0
  134
  145
  160
  176
  192
  209
  226
  244
  263
  283
  257
  279
  302
  325
  350
  376
  404
  432
  462
  494
  527
  562
  598
  636
  677
  719
  763
  809
  858
  910
Cash from financing (excl. dividends), $m  
  -52
  306
  326
  364
  403
  442
  482
  522
  563
  606
  651
  650
  697
  747
  797
  851
  906
  965
  1,025
  1,088
  1,155
  1,224
  1,297
  1,372
  1,451
  1,536
  1,623
  1,714
  1,810
  1,911
  2,017
Total cash flow (excl. dividends), $m
  362
  256
  266
  295
  323
  351
  378
  407
  435
  464
  494
  478
  509
  541
  574
  609
  645
  682
  721
  761
  804
  848
  894
  942
  992
  1,044
  1,099
  1,157
  1,217
  1,281
  1,347
Retained Cash Flow (-), $m
  -150
  -134
  -145
  -160
  -176
  -192
  -209
  -226
  -244
  -263
  -283
  -257
  -279
  -302
  -325
  -350
  -376
  -404
  -432
  -462
  -494
  -527
  -562
  -598
  -636
  -677
  -719
  -763
  -809
  -858
  -910
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
 
  122
  122
  135
  147
  159
  170
  180
  191
  201
  210
  220
  230
  239
  249
  259
  269
  279
  289
  299
  310
  321
  332
  344
  356
  368
  381
  394
  408
  422
  437
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
 
  113
  103
  104
  102
  98
  93
  86
  79
  71
  63
  55
  47
  39
  33
  26
  21
  16
  13
  9
  7
  5
  3
  2
  2
  1
  1
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  94.8
  89.7
  84.4
  79.2
  74.0
  68.9
  63.9
  59.1
  54.5
  50.1
  46.5
  43.1
  39.8
  36.7
  33.7
  30.9
  28.2
  25.8
  23.5
  21.3
  19.4
  17.5
  15.8
  14.3
  12.9
  11.6
  10.4
  9.4
  8.4
  7.5

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 13.4
Price to Sales 0.9
Price to Book 0.6
Price to Tangible Book
Price to Cash Flow 3
Price to Free Cash Flow 6.2
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 2.2% 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 287.724 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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