U.S. Markets closed

Investors Are Undervaluing Dunelm Group plc (LON:DNLM) By 30.08%, Here Is My Intrinsic Value Calculation

Pam Parks

Does the share price for Dunelm Group plc (LSE:DNLM) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. 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 March 2018 so be sure check the latest calculation for Dunelm Group here.

Is DNLM fairly valued?

I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I use the analyst consensus estimates of DNLM’s levered free cash flow (FCF) over the next five years and discounted these figures 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 UK£395.19M. Want to know how I arrived at this number? Read our detailed analysis here.

LSE:DNLM Future Profit Mar 7th 18

In the visual above, we see how how DNLM’s earnings are expected to move in the future, which should give you some color on DNLM’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate 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£1.25B.

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 UK£1.64B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £8.12, which, compared to the current share price of £5.68, we find that Dunelm Group is quite undervalued at a 30.08% 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 DNLM, there are three essential aspects you should look at:

  1. Financial Health: Does DNLM 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.
  2. Future Earnings: How does DNLM’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: Are there other high quality stocks you could be holding instead of DNLM? 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 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.