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Calculating The Fair Value Of Next Fifteen Communications Group plc (LON:NFC)

In This Article:

Does the January share price for Next Fifteen Communications Group plc (LON:NFC) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Next Fifteen Communications Group

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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF (£, Millions)

UK£50.4m

UK£48.7m

UK£52.6m

UK£52.1m

UK£51.9m

UK£51.9m

UK£52.0m

UK£52.3m

UK£52.6m

UK£52.9m

Growth Rate Estimate Source

Analyst x2

Analyst x3

Analyst x2

Est @ -0.92%

Est @ -0.37%

Est @ 0.01%

Est @ 0.28%

Est @ 0.46%

Est @ 0.59%

Est @ 0.69%

Present Value (£, Millions) Discounted @ 5.0%

UK£48.0

UK£44.2

UK£45.4

UK£42.9

UK£40.7

UK£38.8

UK£37.0

UK£35.4

UK£34.0

UK£32.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£398m

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 (0.9%) 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 5.0%.