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I am going to run you through how I calculated the intrinsic value of Watkin Jones Plc (
LON:WJG
) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use 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 February 2019 then I highly recommend you check out the latest calculation for Watkin Jones by following the link below.
View our latest analysis for Watkin Jones
The method
I’m 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 perpetual stable growth rate. 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. 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 estimate
2019
2020
2021
2022
2023
Levered FCF (£, Millions)
£32.15
£36.05
£42.65
£48.44
£55.02
Source
Analyst x2
Analyst x2
Analyst x2
Est @ 13.58%
Est @ 13.58%
Present Value Discounted @ 8.25%
£29.70
£30.77
£33.63
£35.28
£37.02
Present Value of 5-year Cash Flow (PVCF)
= UK£166m
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 (1.2%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV)
= FCF
2023
× (1 + g) ÷ (r – g) = UK£55m × (1 + 1.2%) ÷ (8.2% – 1.2%) = UK£794m
Present Value of Terminal Value (PVTV)
= TV / (1 + r)
5
= UK£794m ÷ ( 1 + 8.2%)
5
= UK£534m
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is UK£700m. 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 £2.74
. Relative to the current share price of £2.33, the stock is about right, perhaps slightly undervalued at a 15% discount to what it is available for right now.
Story continues
AIM:WJG Intrinsic Value Export February 1st 19
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 Watkin Jones 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 8.2%, 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:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For WJG, I’ve put together three relevant factors you should further examine:
Financial Health
: Does WJG 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 WJG’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 WJG? 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
.
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