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Avon Protection plc (LON:AVON) Shares Could Be 26% Below Their Intrinsic Value Estimate

In This Article:

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Avon Protection fair value estimate is UK£18.44

  • Avon Protection is estimated to be 26% undervalued based on current share price of UK£13.56

  • The US$13.43 analyst price target for AVON is 27% less than our estimate of fair value

Today we will run through one way of estimating the intrinsic value of Avon Protection plc (LON:AVON) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Avon Protection

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$29.0m

US$17.4m

US$32.9m

US$34.8m

US$36.4m

US$37.8m

US$39.0m

US$40.1m

US$41.0m

US$42.0m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x3

Est @ 5.88%

Est @ 4.64%

Est @ 3.78%

Est @ 3.18%

Est @ 2.76%

Est @ 2.46%

Est @ 2.25%

Present Value ($, Millions) Discounted @ 6.6%

US$27.2

US$15.3

US$27.1

US$26.9

US$26.4

US$25.7

US$24.9

US$24.0

US$23.0

US$22.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$243m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (1.8%) 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 6.6%.