An Intrinsic Value Calculation For Centrica plc (LSE:CNA) Shows It’s 25.04% Undervalued
In this article I am going to calculate the intrinsic value of Centrica plc (LSE:CNA) 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 December 2017 so be sure check the latest calculation for Centrica here.
Is CNA fairly valued?
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 start off, I took the analyst consensus estimates of CNA’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.3%. This resulted in a present value of 5-year cash flow of £3,809.6M. Want to know how I calculated this value? Check out our detailed analysis here.
Above is a visual representation of how CNA’s top and bottom lines are expected to move going forward, which should give you some color on CNA’s outlook. Secondly, I 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. The present value of the terminal value after discounting it back five years is £7,124.9M.
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 £10,934.6M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £1.96, which, compared to the current share price of £1.466, we see that Centrica is about right, perhaps slightly undervalued at a 25.04% 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 CNA, I’ve compiled three essential factors you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the LSE 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.
