Intrinsic value of Dominion Diamond - DDC

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$12.45

  Intrinsic Value

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  Value-price divergence*

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

We calculate the intrinsic value of DDC 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 2017), $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 1.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -20.80
  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
  571
  735
  752
  772
  793
  817
  844
  873
  904
  937
  973
  1,012
  1,053
  1,096
  1,143
  1,192
  1,244
  1,300
  1,358
  1,420
  1,485
  1,554
  1,627
  1,703
  1,784
  1,869
  1,958
  2,052
  2,151
  2,255
  2,365
Variable operating expenses, $m
 
  115
  118
  121
  125
  128
  132
  137
  142
  147
  153
  159
  165
  172
  179
  187
  195
  204
  213
  223
  233
  244
  255
  267
  280
  293
  307
  322
  337
  354
  371
Fixed operating expenses, $m
 
  603
  618
  633
  649
  665
  682
  699
  716
  734
  753
  772
  791
  811
  831
  852
  873
  895
  917
  940
  964
  988
  1,012
  1,038
  1,064
  1,090
  1,117
  1,145
  1,174
  1,203
  1,233
Total operating expenses, $m
  627
  718
  736
  754
  774
  793
  814
  836
  858
  881
  906
  931
  956
  983
  1,010
  1,039
  1,068
  1,099
  1,130
  1,163
  1,197
  1,232
  1,267
  1,305
  1,344
  1,383
  1,424
  1,467
  1,511
  1,557
  1,604
Operating income, $m
  -57
  17
  16
  17
  20
  24
  29
  37
  45
  56
  68
  81
  97
  114
  133
  154
  176
  201
  228
  257
  289
  323
  359
  398
  440
  485
  534
  585
  640
  698
  761
EBITDA, $m
  153
  211
  215
  221
  229
  239
  252
  267
  284
  303
  324
  348
  374
  403
  434
  468
  504
  544
  586
  632
  680
  732
  788
  847
  911
  978
  1,050
  1,126
  1,207
  1,293
  1,384
Interest expense (income), $m
  3
  1
  2
  4
  5
  7
  10
  12
  15
  17
  20
  24
  27
  31
  35
  39
  44
  48
  53
  59
  64
  70
  76
  83
  90
  97
  105
  113
  122
  131
  140
Earnings before tax, $m
  -41
  16
  14
  14
  14
  16
  20
  25
  31
  38
  47
  58
  70
  83
  98
  114
  133
  153
  175
  199
  224
  252
  283
  315
  350
  388
  429
  472
  518
  568
  621
Tax expense, $m
  -28
  4
  4
  4
  4
  4
  5
  7
  8
  10
  13
  16
  19
  22
  26
  31
  36
  41
  47
  54
  61
  68
  76
  85
  95
  105
  116
  127
  140
  153
  168
Net income, $m
  0
  12
  10
  10
  10
  12
  14
  18
  22
  28
  34
  42
  51
  61
  71
  84
  97
  112
  128
  145
  164
  184
  206
  230
  256
  283
  313
  344
  378
  414
  453

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  136
  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
  2,004
  1,881
  1,924
  1,974
  2,029
  2,091
  2,158
  2,232
  2,311
  2,397
  2,489
  2,587
  2,692
  2,804
  2,923
  3,049
  3,183
  3,324
  3,474
  3,632
  3,799
  3,975
  4,160
  4,356
  4,562
  4,779
  5,008
  5,249
  5,502
  5,769
  6,049
Adjusted assets (=assets-cash), $m
  1,868
  1,881
  1,924
  1,974
  2,029
  2,091
  2,158
  2,232
  2,311
  2,397
  2,489
  2,587
  2,692
  2,804
  2,923
  3,049
  3,183
  3,324
  3,474
  3,632
  3,799
  3,975
  4,160
  4,356
  4,562
  4,779
  5,008
  5,249
  5,502
  5,769
  6,049
Revenue / Adjusted assets
  0.306
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
Average production assets, $m
  1,301
  1,338
  1,368
  1,404
  1,443
  1,487
  1,535
  1,587
  1,644
  1,705
  1,770
  1,840
  1,915
  1,994
  2,079
  2,169
  2,264
  2,364
  2,471
  2,583
  2,702
  2,827
  2,959
  3,098
  3,245
  3,399
  3,562
  3,733
  3,913
  4,103
  4,302
Working capital, $m
  435
  285
  292
  299
  308
  317
  327
  339
  351
  364
  378
  393
  408
  425
  443
  463
  483
  504
  527
  551
  576
  603
  631
  661
  692
  725
  760
  796
  835
  875
  918
Total debt, $m
  11
  28
  49
  72
  98
  126
  158
  192
  229
  269
  312
  358
  407
  460
  515
  574
  636
  702
  772
  846
  924
  1,006
  1,093
  1,184
  1,281
  1,382
  1,489
  1,601
  1,719
  1,844
  1,975
Total liabilities, $m
  785
  878
  899
  922
  948
  976
  1,008
  1,042
  1,079
  1,119
  1,162
  1,208
  1,257
  1,310
  1,365
  1,424
  1,486
  1,552
  1,622
  1,696
  1,774
  1,856
  1,943
  2,034
  2,131
  2,232
  2,339
  2,451
  2,569
  2,694
  2,825
Total equity, $m
  1,219
  1,003
  1,026
  1,052
  1,082
  1,114
  1,150
  1,189
  1,232
  1,278
  1,327
  1,379
  1,435
  1,495
  1,558
  1,625
  1,696
  1,772
  1,851
  1,936
  2,025
  2,118
  2,217
  2,322
  2,432
  2,547
  2,669
  2,798
  2,933
  3,075
  3,224
Total liabilities and equity, $m
  2,004
  1,881
  1,925
  1,974
  2,030
  2,090
  2,158
  2,231
  2,311
  2,397
  2,489
  2,587
  2,692
  2,805
  2,923
  3,049
  3,182
  3,324
  3,473
  3,632
  3,799
  3,974
  4,160
  4,356
  4,563
  4,779
  5,008
  5,249
  5,502
  5,769
  6,049
Debt-to-equity ratio
  0.009
  0.030
  0.050
  0.070
  0.090
  0.110
  0.140
  0.160
  0.190
  0.210
  0.240
  0.260
  0.280
  0.310
  0.330
  0.350
  0.380
  0.400
  0.420
  0.440
  0.460
  0.470
  0.490
  0.510
  0.530
  0.540
  0.560
  0.570
  0.590
  0.600
  0.610
Adjusted equity ratio
  0.580
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  0
  12
  10
  10
  10
  12
  14
  18
  22
  28
  34
  42
  51
  61
  71
  84
  97
  112
  128
  145
  164
  184
  206
  230
  256
  283
  313
  344
  378
  414
  453
Depreciation, amort., depletion, $m
  210
  194
  198
  204
  209
  216
  223
  230
  238
  247
  257
  267
  278
  289
  301
  314
  328
  343
  358
  374
  392
  410
  429
  449
  470
  493
  516
  541
  567
  595
  623
Funds from operations, $m
  64
  206
  209
  213
  220
  228
  237
  248
  261
  275
  291
  309
  328
  350
  373
  398
  425
  454
  486
  519
  555
  594
  635
  679
  726
  776
  829
  886
  945
  1,009
  1,077
Change in working capital, $m
  -53
  6
  7
  8
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  25
  27
  28
  30
  31
  33
  35
  37
  38
  40
  43
Cash from operations, $m
  117
  194
  202
  206
  211
  218
  227
  237
  249
  262
  277
  294
  312
  333
  355
  379
  405
  433
  463
  495
  530
  567
  607
  650
  695
  743
  794
  849
  907
  969
  1,034
Maintenance CAPEX, $m
  0
  -190
  -194
  -198
  -203
  -209
  -215
  -222
  -230
  -238
  -247
  -257
  -267
  -278
  -289
  -301
  -314
  -328
  -343
  -358
  -374
  -392
  -410
  -429
  -449
  -470
  -493
  -516
  -541
  -567
  -595
New CAPEX, $m
  -309
  -26
  -31
  -35
  -39
  -44
  -48
  -52
  -57
  -61
  -65
  -70
  -75
  -80
  -85
  -90
  -95
  -101
  -106
  -112
  -119
  -125
  -132
  -139
  -147
  -154
  -163
  -171
  -180
  -190
  -199
Cash from investing activities, $m
  -216
  -216
  -225
  -233
  -242
  -253
  -263
  -274
  -287
  -299
  -312
  -327
  -342
  -358
  -374
  -391
  -409
  -429
  -449
  -470
  -493
  -517
  -542
  -568
  -596
  -624
  -656
  -687
  -721
  -757
  -794
Free cash flow, $m
  -99
  -22
  -22
  -28
  -32
  -35
  -37
  -38
  -38
  -37
  -35
  -33
  -29
  -24
  -19
  -12
  -5
  4
  14
  25
  37
  51
  65
  82
  99
  118
  139
  162
  186
  212
  240
Issuance/(repayment) of debt, $m
  -23
  16
  20
  23
  26
  29
  32
  34
  37
  40
  43
  46
  49
  52
  55
  59
  62
  66
  70
  74
  78
  82
  87
  91
  96
  101
  107
  112
  118
  124
  131
Issuance/(repurchase) of shares, $m
  -31
  0
  25
  31
  35
  39
  41
  43
  43
  43
  41
  39
  36
  32
  27
  21
  13
  5
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -52
  16
  45
  54
  61
  68
  73
  77
  80
  83
  84
  85
  85
  84
  82
  80
  75
  71
  70
  74
  78
  82
  87
  91
  96
  101
  107
  112
  118
  124
  131
Total cash flow (excl. dividends), $m
  -150
  -6
  -2
  -4
  -6
  -6
  -5
  -3
  -1
  3
  8
  13
  20
  28
  37
  47
  58
  70
  84
  99
  115
  133
  152
  173
  195
  220
  246
  274
  304
  336
  371
Retained Cash Flow (-), $m
  62
  -20
  -23
  -26
  -30
  -33
  -36
  -39
  -42
  -46
  -49
  -52
  -56
  -60
  -63
  -67
  -71
  -75
  -80
  -84
  -89
  -94
  -99
  -104
  -110
  -116
  -122
  -128
  -135
  -142
  -149
Prev. year cash balance distribution, $m
 
  298
  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
 
  272
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  4
  14
  26
  39
  53
  69
  86
  104
  124
  146
  169
  194
  222
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  261
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  2
  3
  4
  4
  4
  4
  4
  4
  3
  3
  2
  2
Current shareholders' claim on cash, %
  100
  100.0
  96.9
  93.4
  89.7
  85.8
  82.0
  78.4
  75.0
  71.9
  69.1
  66.6
  64.5
  62.7
  61.4
  60.4
  59.7
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5
  59.5

Dominion Diamond Corporation engages in the mining and marketing of rough diamonds. It operates through Diavik Diamond Mine and Ekati Diamond Mine segments. The company holds an 88.9% ownership interest in the Ekati group of mineral claims, as well as a 65.3% ownership interest in other reserves; and a 40% ownership interest in the Diavik group of mineral claims located at Lac de Gras in Northwest Territories, Canada. It produces, sorts, and sells rough diamonds in North America, Europe, and India. The company was formerly known as Harry Winston Diamond Corporation and changed its name to Dominion Diamond Corporation in March 2013. Dominion Diamond Corporation was founded in 1980 and is headquartered in Yellowknife, Canada.

FINANCIAL RATIOS  of  Dominion Diamond (DDC)

Valuation Ratios
P/E Ratio 0
Price to Sales 1.8
Price to Book 0.8
Price to Tangible Book
Price to Cash Flow 8.7
Price to Free Cash Flow -5.3
Growth Rates
Sales Growth Rate -20.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 47.1%
Cap. Spend. - 3 Yr. Gr. Rate 20.4%
Financial Strength
Quick Ratio 12
Current Ratio 0.2
LT Debt to Equity 0%
Total Debt to Equity 0.9%
Interest Coverage -13
Management Effectiveness
Return On Assets 0%
Ret/ On Assets - 3 Yr. Avg. 0.6%
Return On Total Capital 0%
Ret/ On T. Cap. - 3 Yr. Avg. 0.8%
Return On Equity 0%
Return On Equity - 3 Yr. Avg. 0.8%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 4.6%
Gross Margin - 3 Yr. Avg. 12.4%
EBITDA Margin 30.1%
EBITDA Margin - 3 Yr. Avg. 31.7%
Operating Margin -9.8%
Oper. Margin - 3 Yr. Avg. 4.3%
Pre-Tax Margin -7.2%
Pre-Tax Margin - 3 Yr. Avg. 3.2%
Net Profit Margin 0%
Net Profit Margin - 3 Yr. Avg. 0.9%
Effective Tax Rate 68.3%
Eff/ Tax Rate - 3 Yr. Avg. -33.4%
Payout Ratio 0%

DDC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DDC stock intrinsic value calculation we used $721 million for the last fiscal year's total revenue generated by Dominion Diamond. The default revenue input number comes from 2017 income statement of Dominion Diamond. 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 DDC 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 4.3%, whose default value for DDC is calculated based on our internal credit rating of Dominion Diamond, 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 Dominion Diamond.
    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 DDC stock the variable cost ratio is equal to 15.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $588 million in the base year in the intrinsic value calculation for DDC 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 7.6% for Dominion Diamond.

Corporate tax rate of 27% is the nominal tax rate for Dominion Diamond. 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 DDC 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 DDC are equal to 181.9%.

Life of production assets of 6.9 years is the average useful life of capital assets used in Dominion Diamond 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 DDC is equal to 38.8%. 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 - $1281 million for Dominion Diamond - 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 82.125 million for Dominion Diamond 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 Dominion Diamond at the current share price and the inputted number of shares is $1.0 billion.


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COMPANY NEWS

▶ Dominion Diamond reports 1Q loss   [Jun-12-17 05:30PM  Associated Press]
▶ Dominion Diamond posts 4Q profit   [06:04PM  Associated Press]
▶ [$$] Dominion Diamond to Explore Strategic Alternatives   [06:56AM  The Wall Street Journal]
▶ [$$] Dominion Diamond to Explore Strategic Alternatives   [06:56AM  at The Wall Street Journal]
▶ Dominion Diamond Corporation Provides Update   [Mar-22-17 06:30AM  Business Wire]
▶ [$$] Washington Cos. Makes Bid for Dominion Diamond   [06:47PM  at The Wall Street Journal]
▶ Here is What Hedge Funds Think About Dominion Diamond Corp (DDC)   [Dec-09-16 02:27AM  at Insider Monkey]
▶ Dominion Diamond Trades Ex-Dividend Thursday (DDC)   [Oct-05-16 08:46AM  at Investopedia]
▶ Short-Sellers Are Busy Covering Their Bets Against These Stocks   [Oct-03-16 04:04PM  at Insider Monkey]
Stock chart of DDC Financial statements of DDC
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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