Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of The 600 Group PLC (LON:SIXH) as an investment opportunity by projecting its future cash flows and then discounting them to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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 and its not October 2018 then I highly recommend you check out the latest calculation for 600 Group by following the link below.
View our latest analysis for 600 Group
The model
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF ($, Millions) | $1.70 | $3.20 | $3.12 | $3.04 | $2.97 |
| Source | Analyst x1 | Analyst x1 | Est @ -2.47% | Est @ -2.47% | Est @ -2.47% |
| Present Value Discounted @ 12.19% | $1.52 | $2.54 | $2.21 | $1.92 | $1.67 |
Present Value of 5-year Cash Flow (PVCF)= US$10m
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (1.4%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 12.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$3m × (1 + 1.4%) ÷ (12.2% – 1.4%) = US$28m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$28m ÷ ( 1 + 12.2%)5 = US$16m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$26m. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of $0.23. However, SIXH’s primary listing is in United Kingdom, and 1 share of SIXH in USD represents 0.760 ( USD/ GBP) share of AIM:SIXH, so the intrinsic value per share in GBP is £0.17. Relative to the current share price of £0.17, the stock is about right, perhaps slightly undervalued at a 3.7% discount to what it is available for right now.