U.S. markets open in 6 hours 24 minutes
  • S&P Futures

    4,270.75
    -10.25 (-0.24%)
     
  • Dow Futures

    33,645.00
    -73.00 (-0.22%)
     
  • Nasdaq Futures

    13,544.00
    -33.75 (-0.25%)
     
  • Russell 2000 Futures

    2,010.50
    -6.40 (-0.32%)
     
  • Crude Oil

    91.27
    -0.82 (-0.89%)
     
  • Gold

    1,807.60
    -7.90 (-0.44%)
     
  • Silver

    20.58
    -0.12 (-0.59%)
     
  • EUR/USD

    1.0239
    -0.0019 (-0.18%)
     
  • 10-Yr Bond

    2.8490
    0.0000 (0.00%)
     
  • Vix

    19.53
    -0.67 (-3.32%)
     
  • GBP/USD

    1.2105
    -0.0034 (-0.28%)
     
  • USD/JPY

    133.2500
    -0.2300 (-0.17%)
     
  • BTC-USD

    24,170.79
    -510.62 (-2.07%)
     
  • CMC Crypto 200

    573.89
    +2.60 (+0.46%)
     
  • FTSE 100

    7,500.89
    0.00 (0.00%)
     
  • Nikkei 225

    28,871.78
    +324.80 (+1.14%)
     

Calculating The Intrinsic Value Of Bango plc (LON:BGO)

  • Oops!
    Something went wrong.
    Please try again later.
·5 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

How far off is Bango plc (LON:BGO) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Bango

The calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate 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

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF ($, Millions)

US$1.06m

US$2.65m

US$4.36m

US$5.74m

US$7.03m

US$8.15m

US$9.08m

US$9.83m

US$10.4m

US$10.9m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Analyst x2

Est @ 31.65%

Est @ 22.42%

Est @ 15.96%

Est @ 11.43%

Est @ 8.27%

Est @ 6.05%

Est @ 4.5%

Present Value ($, Millions) Discounted @ 5.7%

US$1.0

US$2.4

US$3.7

US$4.6

US$5.3

US$5.8

US$6.1

US$6.3

US$6.3

US$6.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$47m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 5-year average of the 10-year government bond yield (0.9%) 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 5.7%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US$11m× (1 + 0.9%) ÷ (5.7%– 0.9%) = US$226m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$226m÷ ( 1 + 5.7%)10= US$130m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$177m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£1.5, the company appears about fair value at a 17% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Bango 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 5.7%, which is based on a levered beta of 1.003. 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.

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Bango, there are three additional items you should look at:

  1. Risks: As an example, we've found 2 warning signs for Bango that you need to consider before investing here.

  2. Future Earnings: How does BGO'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.

  3. Other High Quality Alternatives: Do you like a good all-rounder? 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 updates its DCF calculation for every British stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.