Speedy Hire Plc's (LON:SDY) Intrinsic Value Is Potentially 35% Above Its Share Price

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editorial-team@simplywallst.com (Simply Wall St)

Thu, Feb 13, 2025, 11:02 PM 6 min read

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Speedy Hire Plc (LON:SDY) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Speedy Hire

The Model

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (£, Millions)	-UK£2.84m	UK£14.6m	UK£20.7m	UK£18.1m	UK£16.6m	UK£15.8m	UK£15.4m	UK£15.2m	UK£15.1m	UK£15.2m
Growth Rate Estimate Source	Analyst x4	Analyst x4	Analyst x4	Est @ -12.57%	Est @ -8.11%	Est @ -4.99%	Est @ -2.80%	Est @ -1.27%	Est @ -0.20%	Est @ 0.55%
Present Value (£, Millions) Discounted @ 13%	-UK£2.5	UK£11.5	UK£14.5	UK£11.3	UK£9.2	UK£7.8	UK£6.7	UK£5.9	UK£5.2	UK£4.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£74m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = UK£15m× (1 + 2.3%) ÷ (13%– 2.3%) = UK£152m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£152m÷ ( 1 + 13%)¹⁰= UK£46m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£121m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of UK£0.2, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf — LSE:SDY Discounted Cash Flow February 14th 2025

Important Assumptions

Now 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 these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Speedy Hire as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 13%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Speedy Hire

Strength

Debt is well covered by cash flow.

Dividend is in the top 25% of dividend payers in the market.

Weakness

Interest payments on debt are not well covered.

Opportunity

Expected to breakeven next year.

Has sufficient cash runway for more than 3 years based on current free cash flows.

Good value based on P/S ratio and estimated fair value.

Significant insider buying over the past 3 months.

Threat

Paying a dividend but company is unprofitable.

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Speedy Hire, we've compiled three essential items you should consider:

Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Speedy Hire (at least 1 which is a bit unpleasant) , and understanding these should be part of your investment process.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for SDY's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.