Calculating The Fair Value Of Triad Group plc (LON:TRD)

editorial-team@simplywallst.com (Simply Wall St)

Mon, Jan 27, 2025, 10:44 PM 6 min read

Today we will run through one way of estimating the intrinsic value of Triad Group plc (LON:TRD) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Triad Group

The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (£, Millions)	UK£1.67m	UK£2.30m	UK£2.92m	UK£3.49m	UK£3.98m	UK£4.41m	UK£4.77m	UK£5.07m	UK£5.32m	UK£5.54m
Growth Rate Estimate Source	Est @ 52.92%	Est @ 37.68%	Est @ 27.01%	Est @ 19.54%	Est @ 14.31%	Est @ 10.65%	Est @ 8.09%	Est @ 6.29%	Est @ 5.04%	Est @ 4.16%
Present Value (£, Millions) Discounted @ 7.7%	UK£1.5	UK£2.0	UK£2.3	UK£2.6	UK£2.8	UK£2.8	UK£2.8	UK£2.8	UK£2.7	UK£2.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£25m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = UK£5.5m× (1 + 2.1%) ÷ (7.7%– 2.1%) = UK£102m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£102m÷ ( 1 + 7.7%)¹⁰= UK£49m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£74m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£3.6, the company appears about fair value at a 18% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf — LSE:TRD Discounted Cash Flow January 28th 2025

Important 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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Triad Group 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 7.7%, which is based on a levered beta of 1.148. 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.

SWOT Analysis for Triad Group

Strength

Currently debt free.

Weakness

Dividend is low compared to the top 25% of dividend payers in the IT market.

Opportunity

Current share price is below our estimate of fair value.

Lack of analyst coverage makes it difficult to determine TRD's earnings prospects.

Threat

Dividends are not covered by earnings and cashflows.

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Triad Group, there are three additional factors you should assess:

Risks: As an example, we've found 3 warning signs for Triad Group (1 doesn't sit too well with us!) that you need to consider before investing here.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks just search here.

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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.