U.S. markets open in 6 hours 12 minutes
  • S&P Futures

    4,266.50
    +11.75 (+0.28%)
     
  • Dow Futures

    34,452.00
    +71.00 (+0.21%)
     
  • Nasdaq Futures

    14,161.00
    +36.25 (+0.26%)
     
  • Russell 2000 Futures

    2,328.20
    +4.60 (+0.20%)
     
  • Crude Oil

    71.15
    +0.27 (+0.38%)
     
  • Gold

    1,869.00
    +3.10 (+0.17%)
     
  • Silver

    27.83
    -0.20 (-0.73%)
     
  • EUR/USD

    1.2143
    +0.0021 (+0.17%)
     
  • 10-Yr Bond

    1.5010
    0.0000 (0.00%)
     
  • Vix

    16.39
    +0.74 (+4.73%)
     
  • GBP/USD

    1.4115
    +0.0008 (+0.05%)
     
  • USD/JPY

    110.0300
    -0.0310 (-0.03%)
     
  • BTC-USD

    40,215.06
    +590.88 (+1.49%)
     
  • CMC Crypto 200

    1,009.49
    +40.65 (+4.20%)
     
  • FTSE 100

    7,156.61
    +9.93 (+0.14%)
     
  • Nikkei 225

    29,441.30
    +279.50 (+0.96%)
     

UP Global Sourcing Holdings plc (LON:UPGS) Shares Could Be 23% Above Their Intrinsic Value Estimate

  • Oops!
    Something went wrong.
    Please try again later.
·6 min read
  • Oops!
    Something went wrong.
    Please try again later.

In this article we are going to estimate the intrinsic value of UP Global Sourcing Holdings plc (LON:UPGS) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for UP Global Sourcing Holdings

The calculation

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

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF (£, Millions)

UK£955.0k

UK£6.70m

UK£8.09m

UK£7.37m

UK£6.93m

UK£6.66m

UK£6.50m

UK£6.41m

UK£6.36m

UK£6.34m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Analyst x1

Est @ -8.9%

Est @ -5.95%

Est @ -3.89%

Est @ -2.45%

Est @ -1.44%

Est @ -0.73%

Est @ -0.24%

Present Value (£, Millions) Discounted @ 6.6%

UK£0.9

UK£5.9

UK£6.7

UK£5.7

UK£5.0

UK£4.6

UK£4.2

UK£3.9

UK£3.6

UK£3.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£43m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 0.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.6%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = UK£6.3m× (1 + 0.9%) ÷ (6.6%– 0.9%) = UK£114m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£114m÷ ( 1 + 6.6%)10= UK£60m

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 UK£103m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£1.6, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

The 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 UP Global Sourcing 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 6.6%, which is based on a levered beta of 1.060. 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. Can we work out why the company is trading at a premium to intrinsic value? For UP Global Sourcing Holdings, we've compiled three additional aspects you should further research:

  1. Risks: Take risks, for example - UP Global Sourcing Holdings has 3 warning signs we think you should be aware of.

  2. Future Earnings: How does UPGS'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 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. 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.

This article by Simply Wall St is general in nature. 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.

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