In this article I am going to calculate the intrinsic value of Bunzl plc (LSE:BNZL) using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after January 2018 then I highly recommend you check out the latest calculation for Bunzl here.
Crunching the numbers
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I took the analyst consensus forecast of BNZL’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.3%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of £1,813.4M. Want to know how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how BNZL’s earnings are expected to move in the future, which should give you some color on BNZL’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes £4,930.1M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £6,743.6M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £20.46, which, compared to the current share price of £20.45, we find that Bunzl is about right, perhaps slightly undervalued at a 0.06% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For BNZL, I’ve put together three relevant aspects you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the LSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.