U.S. markets close in 1 hour 32 minutes
  • S&P 500

    4,118.20
    +55.16 (+1.36%)
     
  • Dow 30

    34,096.59
    +508.93 (+1.52%)
     
  • Nasdaq

    13,121.30
    +89.62 (+0.69%)
     
  • Russell 2000

    2,158.05
    +22.91 (+1.07%)
     
  • Crude Oil

    63.83
    -2.25 (-3.40%)
     
  • Gold

    1,825.00
    +2.20 (+0.12%)
     
  • Silver

    27.12
    -0.12 (-0.46%)
     
  • EUR/USD

    1.2076
    0.0000 (-0.00%)
     
  • 10-Yr Bond

    1.6680
    -0.0270 (-1.59%)
     
  • GBP/USD

    1.4029
    -0.0028 (-0.20%)
     
  • USD/JPY

    109.4830
    -0.1770 (-0.16%)
     
  • BTC-USD

    48,443.55
    -5,911.84 (-10.88%)
     
  • CMC Crypto 200

    1,310.02
    -77.89 (-5.61%)
     
  • FTSE 100

    6,963.33
    -41.30 (-0.59%)
     
  • Nikkei 225

    27,448.01
    -699.50 (-2.49%)
     

An Intrinsic Calculation For IG Design Group plc (LON:IGR) Suggests It's 47% Undervalued

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

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of IG Design Group plc (LON:IGR) 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. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for IG Design Group

Step by step through 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 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$36.3m

US$49.6m

US$97.9m

US$113.2m

US$125.9m

US$136.2m

US$144.4m

US$151.0m

US$156.2m

US$160.4m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x1

Est @ 15.65%

Est @ 11.25%

Est @ 8.18%

Est @ 6.02%

Est @ 4.52%

Est @ 3.46%

Est @ 2.72%

Present Value ($, Millions) Discounted @ 9.1%

US$33.2

US$41.7

US$75.4

US$79.9

US$81.4

US$80.7

US$78.5

US$75.2

US$71.3

US$67.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$684m

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 1.0%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$160m× (1 + 1.0%) ÷ (9.1%– 1.0%) = US$2.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.0b÷ ( 1 + 9.1%)10= US$836m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$1.5b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of UK£6.0, the company appears quite undervalued at a 47% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

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 IG Design Group 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 9.1%, which is based on a levered beta of 1.361. 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:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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. Why is the intrinsic value higher than the current share price? For IG Design Group, we've compiled three additional items you should explore:

  1. Risks: For example, we've discovered 2 warning signs for IG Design Group that you should be aware of before investing here.

  2. Future Earnings: How does IGR'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. 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.

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.