Key Insights

Transurban Group's estimated fair value is AU$14.53 based on 2 Stage Free Cash Flow to Equity Current share price of AU$14.06 suggests Transurban Group is potentially trading close to its fair value The AU$14.21 analyst price target for TCL is 2.2% less than our estimate of fair value

How far off is Transurban Group (ASX:TCL) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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Step By Step Through The Calculation

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (A$, Millions)  AU$2.35b AU$2.24b AU$2.28b AU$2.42b AU$2.60b AU$2.72b AU$2.83b AU$2.93b AU$3.04b AU$3.14b Growth Rate Estimate Source Analyst x4 Analyst x3 Analyst x2 Analyst x1 Analyst x1 Est @ 4.47% Est @ 4.06% Est @ 3.78% Est @ 3.58% Est @ 3.44% Present Value (A$, Millions) Discounted @ 8.3%  AU$2.2k AU$1.9k AU$1.8k AU$1.8k AU$1.7k AU$1.7k AU$1.6k AU$1.6k AU$1.5k AU$1.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$17b



We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 3.1%. We discount the terminal cash flows to today's value at a cost of equity of 8.3%.

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$3.1b× (1 + 3.1%) ÷ (8.3%– 3.1%) = AU$62b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$62b÷ ( 1 + 8.3%)10= AU$28b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$45b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$14.1, the company appears about fair value at a 3.2% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.ASX:TCL Discounted Cash Flow October 6th 2025

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Transurban 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 8.3%, which is based on a levered beta of 1.233. 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.

Check out our latest analysis for Transurban Group

SWOT Analysis for Transurban Group

Strength

No major strengths identified for TCL.

Weakness

Earnings declined over the past year.

Interest payments on debt are not well covered.

Dividend is low compared to the top 25% of dividend payers in the Infrastructure market.

Opportunity

Annual earnings are forecast to grow faster than the Australian market.

Current share price is below our estimate of fair value.

Threat

Debt is not well covered by operating cash flow.

Dividends are not covered by earnings and cashflows.

Annual revenue is forecast to grow slower than the Australian market.

Moving On:

Although the valuation of a company is important, 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Transurban Group, there are three essential elements you should further examine:

Risks: Consider for instance, the ever-present spectre of investment risk.  We've identified 3 warning signs  with Transurban Group (at least 2 which are potentially serious)  , and understanding them should be part of your investment process. Future Earnings: How does TCL's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. 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 Australian 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.