Investors Are Undervaluing Ei Group plc (LSE:EIG) By 24.99%, Here Is My Intrinsic Value Calculation
Does the share price for Ei Group plc (LSE:EIG) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after November 2017 then I highly recommend you check out the latest calculation for Ei Group here.
Crunching the numbers
We are going to use a two-stage DCF 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. To start off, I took the analyst consensus estimates of EIG’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 14.59%. 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 £391M. Keen to understand how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how EIG’s earnings are expected to move in the future, which should give you some color on EIG’s outlook. Now we need to 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 stable 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 £439M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £830M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £1.75, which, compared to the current share price of £1.31, we find that Ei Group is about right, perhaps slightly undervalued at a 24.99% 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 EIG, there are three key aspects 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.
