Estimating The Fair Value Of Trakm8 Holdings PLC (LON:TRAK)
Key Insights
Using the 2 Stage Free Cash Flow to Equity, Trakm8 Holdings fair value estimate is UK£0.15
With UK£0.17 share price, Trakm8 Holdings appears to be trading close to its estimated fair value
Industry average of 14% suggests Trakm8 Holdings' peers are currently trading at a higher premium to fair value
Today we will run through one way of estimating the intrinsic value of Trakm8 Holdings PLC (LON:TRAK) 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. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Trakm8 Holdings
What's The Estimated Valuation?
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 ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (£, Millions) | UK£1.02m | UK£933.1k | UK£881.8k | UK£851.2k | UK£833.7k | UK£824.7k | UK£821.6k | UK£822.5k | UK£826.2k | UK£831.9k |
Growth Rate Estimate Source | Est @ -12.51% | Est @ -8.38% | Est @ -5.50% | Est @ -3.48% | Est @ -2.06% | Est @ -1.07% | Est @ -0.38% | Est @ 0.11% | Est @ 0.45% | Est @ 0.69% |
Present Value (£, Millions) Discounted @ 12% | UK£0.9 | UK£0.7 | UK£0.6 | UK£0.5 | UK£0.5 | UK£0.4 | UK£0.4 | UK£0.3 | UK£0.3 | UK£0.3 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£5.0m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 5-year average of the 10-year government bond yield (1.2%) 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 12%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = UK£832k× (1 + 1.2%) ÷ (12%– 1.2%) = UK£7.8m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£7.8m÷ ( 1 + 12%)10= UK£2.5m
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£7.5m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£0.2, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Trakm8 Holdings 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 12%, which is based on a levered beta of 1.551. 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.
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Trakm8 Holdings, we've put together three relevant elements you should further examine:
Risks: Case in point, we've spotted 2 warning signs for Trakm8 Holdings you should be aware of.
Future Earnings: How does TRAK'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: 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the AIM every day. If you want to find the calculation for other stocks 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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
