Estimating The Intrinsic Value Of Majestic Wine plc (LON:WINE)

Simply Wall St.

Tue, Nov 20, 2018, 11:03 PM

In this article I am going to calculate the intrinsic value of Majestic Wine plc (LON:WINE) by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for Majestic Wine

What’s the value?

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 start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (£, Millions)	£0.085	£6.60	£21.21	£24.37	£28.01
Source	Analyst x3	Analyst x2	Analyst x3	Est @ 14.91%	Est @ 14.91%
Present Value Discounted @ 8.28%	£0.079	£5.63	£16.71	£17.73	£18.82

Present Value of 5-year Cash Flow (PVCF)= UK£59m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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 8.3%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = UK£28m × (1 + 1.4%) ÷ (8.3% – 1.4%) = UK£413m

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = UK£413m ÷ ( 1 + 8.3%)⁵ = UK£277m

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£336m. 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 £4.66. Relative to the current share price of £3.8, the stock is about right, perhaps slightly undervalued at a 19% discount to what it is available for right now.

AIM:WINE Intrinsic Value Export November 21st 18

Important assumptions

I’d like to 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Majestic Wine as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.3%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For WINE, I’ve compiled three key factors you should further examine:

Financial Health: Does WINE have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does WINE’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of WINE? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every GB stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Terms and Privacy Policy

Your Privacy Choices

Utah Privacy Notice

More Info