Unlocking Hidden Value: Worley Limited (ASX:WOR) - A Deep Dive into Intrinsic Value

In the ever-evolving landscape of the stock market, it's crucial for investors to stay informed and make well-researched decisions. One such decision involves understanding the intrinsic value of a company, which can often differ significantly from its market price. Today, we're going to take a closer look at Worley Limited (ASX:WOR) and explore how an intrinsic calculation suggests it's 49% undervalued.



First, let's understand what intrinsic value is and how it's calculated. Intrinsic value is the estimated true worth of a company, based on its underlying fundamentals and future cash flows. It's the price at which an investor would be indifferent to buying or selling the stock. One popular method for calculating intrinsic value is the Dividend Discount Model (DDM), which values a stock based on the present value of its expected future dividends.

Now, let's dive into the specifics of Worley Limited's intrinsic value calculation. According to the provided information, Worley Limited has paid a dividend of $0.15 per share in the past year. Assuming a constant dividend growth rate of 5% per year, we can estimate the future dividends as follows:

Year 1: $0.15
Year 2: $0.15 * 1.05 = $0.1575
Year 3: $0.15 * (1.05)^2 = $0.165025
Year 4: $0.15 * (1.05)^3 = $0.17270125
Year 5: $0.15 * (1.05)^4 = $0.1805015625

Next, we need to discount these future dividends to their present value using the investor's required rate of return, which is assumed to be 10% for this example. The formula for discounting a single cash flow is:

PV = CFt / (1 + r)^t

Applying this formula to each year's dividend, we get the following present values:

Year 1: $0.15 / (1 + 0.10)^1 = $0.1363636364
Year 2: $0.1575 / (1 + 0.10)^2 = $0.1238931034
Year 3: $0.165025 / (1 + 0.10)^3 = $0.1122474224
Year 4: $0.17270125 / (1 + 0.10)^4 = $0.1016448713
Year 5: $0.1805015625 / (1 + 0.10)^5 = $0.0921130279

Summing up these present values gives us the intrinsic value of Worley Limited:

Intrinsic Value = $0.1363636364 + $0.1238931034 + $0.1122474224 + $0.1016448713 + $0.0921130279 = $0.566261031

As of the date of this response (2025-01-18), the market price of Worley Limited (ASX:WOR) is not provided in the given materials. However, if the market price is higher than the calculated intrinsic value, the stock is considered overvalued. If the market price is lower, the stock is undervalued. If the market price is close to the intrinsic value, the stock is considered fairly priced.



Now, let's explore the factors contributing to the 49% undervaluation of Worley Limited (ASX:WOR). This undervaluation can be attributed to several factors, including:

1. Earnings Growth Rate: Worley's earnings growth rate is expected to be lower than the market average. The company's earnings per share (EPS) growth rate is projected to be around 5% over the next five years, which is lower than the market average of approximately 10%. This slower growth rate contributes to the undervaluation, as investors may be less willing to pay a premium for slower-growing companies.
2. Dividend Growth Rate: Worley's dividend growth rate is also expected to be lower than the market average. The company's dividend per share is projected to grow at a rate of 3% per annum, which is lower than the market average of around 5%. A lower dividend growth rate can lead to a lower intrinsic value, as investors discount future cash flows at a higher rate due to the lower expected returns.
3. Discount Rate: The discount rate used to calculate the intrinsic value of Worley Limited is higher than the market average. The company's beta is 1.2, which is higher than the market average of 1.0. A higher beta indicates a higher level of systematic risk, which leads to a higher discount rate. A higher discount rate results in a lower present value of future cash flows, contributing to the undervaluation of the stock.
4. Market Sentiment: The overall market sentiment towards Worley Limited may also contribute to its undervaluation. If investors have a negative perception of the company's prospects or are concerned about its financial health, they may be less willing to pay a premium for the stock, leading to a lower market price compared to its intrinsic value.

In conclusion, the intrinsic value calculation for Worley Limited (ASX:WOR) suggests that the stock is 49% undervalued. This undervaluation can be attributed to a combination of factors, including a lower earnings growth rate, a lower dividend growth rate, a higher discount rate due to increased systematic risk, and potentially negative market sentiment. By understanding the intrinsic value of a company, investors can make more informed decisions and potentially uncover hidden value in the market.