An Intrinsic Value Calculation For Accrol Group Holdings Plc (AIM:ACRL) Shows It’s 26.57% Undervalued
How far off is Accrol Group Holdings Plc (AIM:ACRL) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for Accrol Group Holdings here.
Is ACRL fairly valued?
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. Firstly, I pulled together the analyst consensus estimates of ACRL’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.3%. 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 £30M. Keen to know how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how ACRL’s top and bottom lines are expected to move going forward, which should give you some color on ACRL’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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 £137M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is £167M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £1.80, which, compared to the current share price of £1.32, we see that Accrol Group Holdings is about right, perhaps slightly undervalued at a 26.57% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it 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 ACRL, I’ve put together three essential factors you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the AIM every 6 hours. If you want to find the calculation for other stocks 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.
