Does the share price for Equiniti Group plc (LON:EQN) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present value. This is done 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 Equiniti Group by following the link below.
View our latest analysis for Equiniti 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. To begin with we have to get estimates of the next five years of cash flows. 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) | £66.64 | £81.41 | £81.40 | £84.90 | £93.16 |
| Source | Analyst x3 | Analyst x3 | Analyst x1 | Analyst x1 | Est @ 9.73% |
| Present Value Discounted @ 8.28% | £61.54 | £69.44 | £64.12 | £61.76 | £62.59 |
Present Value of 5-year Cash Flow (PVCF)= UK£319.4m
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. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 1.4%. We discount this to today’s value at a cost of equity of 8.3%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = UK£93.2m × (1 + 1.4%) ÷ (8.3% – 1.4%) = UK£1.37b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = UK£1.37b ÷ ( 1 + 8.3%)5 = UK£922.1m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£1.24b. 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 of £3.46. Relative to the current share price of £2.66, the stock is about right, perhaps slightly undervalued at a 23.2% discount to what it is available for right now.