Intrinsic Calculation For UBM plc (LON:UBM) Shows Investors Are Overpaying
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of UBM plc (LSE:UBM) as an investment opportunity. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in June 2018 so be sure check the latest calculation for UBM here.
What’s the value?
I use what is known as the 2-stage 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. To begin, I use the analyst consensus forecast of UBM’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.28%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of UK£804.48M. Want to know how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how UBM’s earnings are expected to move in the future, which should give you some color on UBM’s outlook. Secondly, I determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of UK£2.29B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£3.09B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £7.85, which, compared to the current share price of £10.64, we see that UBM is quite expensive at the time of writing.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For UBM, I’ve put together three essential aspects you should look at:
Financial Health: Does UBM 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 UBM’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 UBM? 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 pass 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.
