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How far off is Bunzl plc (LON:BNZL) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by estimating the company’s future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in October 2018 so be sure check out the updated calculation by following the link below.
View our latest analysis for Bunzl
The calculation
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. 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. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (£, Millions) | £460.50 | £480.98 | £524.45 | £571.86 | £623.56 |
| Source | Analyst x8 | Analyst x8 | Est @ 9.04% | Est @ 9.04% | Est @ 9.04% |
| Present Value Discounted @ 8.28% | £425.29 | £410.23 | £413.11 | £416.01 | £418.93 |
Present Value of 5-year Cash Flow (PVCF)= UK£2.1b
The second stage is also known as Terminal Value, this is the business’s cash flow after 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£624m × (1 + 1.4%) ÷ (8.3% – 1.4%) = UK£9.2b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = UK£9.2b ÷ ( 1 + 8.3%)5 = UK£6.2b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£8.3b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of £24.98. Compared to the current share price of £22.07, the stock is about right, perhaps slightly undervalued at a 12% discount to what it is available for right now.
The 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 Bunzl 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.