Key Insights

Aurizon Holdings' estimated fair value is AU$3.73 based on 2 Stage Free Cash Flow to Equity Aurizon Holdings' AU$3.41 share price indicates it is trading at similar levels as its fair value estimate Analyst price target for AZJ is AU$3.43 which is 8.2% below our fair value estimate

In this article we are going to estimate the intrinsic value of Aurizon Holdings Limited (ASX:AZJ) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (A$, Millions)  AU$442.2m AU$509.6m AU$479.5m AU$465.5m AU$460.6m AU$461.8m AU$467.2m AU$475.6m AU$486.4m AU$498.8m Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x4 Est @ -2.92% Est @ -1.05% Est @ 0.25% Est @ 1.17% Est @ 1.81% Est @ 2.26% Est @ 2.57% Present Value (A$, Millions) Discounted @ 9.3%  AU$404 AU$426 AU$367 AU$326 AU$295 AU$270 AU$250 AU$233 AU$218 AU$204

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$3.0b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (3.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.3%.

Story Continues

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$499m× (1 + 3.3%) ÷ (9.3%– 3.3%) = AU$8.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$8.5b÷ ( 1 + 9.3%)10= AU$3.5b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is AU$6.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of AU$3.4, the company appears about fair value at a 8.7% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.ASX:AZJ Discounted Cash Flow November 7th 2025

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Aurizon Holdings 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 9.3%, which is based on a levered beta of 1.436. 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.

See our latest analysis for Aurizon Holdings

SWOT Analysis for Aurizon Holdings

Strength

Debt is well covered by cash flow.

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 Transportation market.

Opportunity

Annual earnings are forecast to grow for the next 3 years.

Good value based on P/E ratio and estimated fair value.

Threat

Dividends are not covered by earnings.

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

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Aurizon Holdings, there are three additional factors you should further examine:

Risks: Take risks, for example - Aurizon Holdings has  2 warning signs  (and 1 which shouldn't be ignored)  we think you should know about. Future Earnings: How does AZJ'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.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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