Are Investors Undervaluing NWF Group plc (LON:NWF) By 46%?

In This Article:

Today we will run through one way of estimating the intrinsic value of NWF Group plc (LON:NWF) by projecting its future cash flows and then discounting them to today's value. I will use the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for NWF Group

Crunching the numbers

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. 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.

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

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Levered FCF (£, Millions)

UK£4.80m

UK£6.33m

UK£7.85m

UK£8.94m

UK£9.83m

UK£10.5m

UK£11.1m

UK£11.5m

UK£11.8m

UK£12.1m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x2

Est @ 13.94%

Est @ 9.92%

Est @ 7.1%

Est @ 5.13%

Est @ 3.75%

Est @ 2.78%

Est @ 2.11%

Present Value (£, Millions) Discounted @ 6.8%

UK£4.5

UK£5.5

UK£6.4

UK£6.9

UK£7.1

UK£7.1

UK£7.0

UK£6.8

UK£6.5

UK£6.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£63m

After calculating the present value of future cash flows in the intial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 10-year government bond rate (0.5%) 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 6.8%.